Filed electronically with the Securities and Exchange Commission
on June 18, 1999
File No. 2-82632
File No. 811-3699
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
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Post-Effective Amendment No. 19
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 23
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SCUDDER GNMA FUND
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(Exact Name of Registrant as Specified in Charter)
Two International Place, Boston, MA 02110-4103
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (617) 295-1000
John Millette
Scudder Kemper Investments, Inc.
Two International Place, Boston, MA 02110-4103
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective
X immediately upon filing pursuant to paragraph (b)
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on ________________ pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(i)
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on ________________ pursuant to paragraph (a)(i)
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75 days after filing pursuant to paragraph (a)(ii)
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on ________________________ pursuant to paragraph (a)(ii) of
-------- Rule 485
If appropriate, check the following:
-------- this post-effective amendment designates a new effective
date for a previously filed post- effective amendment
<PAGE>
Part A (the Prospectus for Scudder GNMA Fund)
Part A of this Post-Effective Amendment No. 19 to the
Registration Statement is incorporated by reference in its
entirety to the Scudder GNMA Fund's Post-Effective Amendment
No. 18 on Form N-1A filed on April 30, 1999.
<PAGE>
SCUDDER GNMA FUND
A Diversified Mutual Fund Which
Seeks to Provide High Income. It does this by investing mainly in
"Ginnie Maes": mortgage-backed securities that are issued or guaranteed
by the Government National Mortgage Association (GNMA).
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STATEMENT OF ADDITIONAL INFORMATION
June 15, 1999
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This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of Scudder GNMA Fund dated May 1, 1999, as
amended from time to time, a copy of which may be obtained without charge by
writing to Scudder Investor Services, Inc., Two International
Place, Boston, Massachusetts 02110-4103.
The Annual Report to Shareholders for Scudder GNMA Fund dated December 31, 1998,
is incorporated by reference and is hereby deemed to be part of this Statement
of Additional Information.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES................................................1
General Investment Objective and Policies..........................................1
Master/feeder structure............................................................2
Investments and Investment Techniques..............................................2
Investment Restrictions...........................................................11
PURCHASES..................................................................................12
Additional Information About Opening An Account...................................12
Minimum balances..................................................................12
Additional Information About Making Subsequent
Investments..................................................................13
Additional Information About Making Subsequent
Investments by QuickBuy......................................................13
Checks............................................................................14
Wire Transfer of Federal Funds....................................................14
Share Price.......................................................................14
Share Certificates................................................................14
Other Information.................................................................14
EXCHANGES AND REDEMPTIONS..................................................................15
Exchanges.........................................................................15
Redemption by Telephone...........................................................16
Redemption by QuickSell...........................................................17
Redemption by Mail or Fax.........................................................17
Other Information.................................................................17
FEATURES AND SERVICES OFFERED BY THE FUND..................................................18
The No-Load Concept...............................................................18
Internet access...................................................................19
Dividends and Capital Gains Distribution Options..................................19
Scudder Investor Centers..........................................................20
Reports to Shareholders...........................................................20
Transaction Summaries.............................................................20
THE SCUDDER FAMILY OF FUNDS................................................................20
SPECIAL PLAN ACCOUNTS......................................................................25
Scudder Retirement Plans: Profit-Sharing and Money
Purchase Pension Plans for Corporations and
Self-Employed Individuals....................................................26
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals...............................26
Scudder IRA: Individual Retirement Account.......................................26
Scudder Roth IRA: Individual Retirement Account..................................27
Scudder 403(b) Plan...............................................................27
Automatic Withdrawal Plan.........................................................27
Group or Salary Deduction Plan....................................................28
Automatic Investment Plan.........................................................28
Uniform Transfers/Gifts to Minors Act.............................................28
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS..................................................29
PERFORMANCE INFORMATION....................................................................29
Average Annual Total Return.......................................................29
Cumulative Total Return...........................................................30
Total Return......................................................................30
Yield.............................................................................30
Comparison of Fund Performance....................................................31
<PAGE>
TABLE OF CONTENTS (continued)
Page
FUND ORGANIZATION..........................................................................34
INVESTMENT ADVISER.........................................................................34
Personal Investments by Employees of the Adviser..................................38
TRUSTEES AND OFFICERS......................................................................38
REMUNERATION...............................................................................39
Responsibilities of the Board -- Board and Committee
Meetings.....................................................................39
Compensation of Officers and Directors............................................40
DISTRIBUTOR................................................................................41
TAXES......................................................................................42
PORTFOLIO TRANSACTIONS.....................................................................45
Brokerage Commissions.............................................................45
Portfolio Turnover................................................................45
NET ASSET VALUE............................................................................46
ADDITIONAL INFORMATION.....................................................................47
Experts...........................................................................47
Shareholder Indemnification.......................................................47
Other Information.................................................................47
FINANCIAL STATEMENTS.......................................................................48
</TABLE>
ii
<PAGE>
THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
(See Fund Description in the Fund's prospectus.)
Scudder GNMA Fund (the "Fund" or "Trust") is a diversified, open-end
management investment company. It is a company of the type commonly known as a
mutual fund.
General Investment Objective and Policies
Descriptions in this Statement of Additional Information of a
particular investment practice or technique in which the Fund may engage (such
as hedging, etc.) or a financial instrument which the Fund may purchase (such as
options, forward foreign currency contracts, etc.) are meant to describe the
spectrum of investments that Scudder Kemper Investments, Inc. (the "Adviser"),
in its discretion, might, but is not required to, use in managing the Fund's
portfolio assets. The Adviser may, in its discretion, at any time employ such
practice, technique or instrument for one or more funds but not for all funds
advised by it. Furthermore, it is possible that certain types of financial
instruments or investment techniques described herein may not be available,
permissible, economically feasible or effective for their intended purposes in
all markets. Certain practices, techniques, or instruments may not be principal
activities of a Fund but, to the extent employed, could from time to time have a
material impact on the Fund's performance.
Scudder GNMA Fund seeks to provide high income. It does this by
investing mainly in "Ginnie Maes": mortgage-backed securities that are issued or
guaranteed by the Government National Mortgage Association (GNMA). Such
guarantees are supported by the full faith and credit of the U.S. Government.
These guarantees apply only to the timely payment of both principal and interest
of the GNMA securities held in the Fund's portfolio. These guarantees do not
apply to the market value or yield of mortgage-backed securities or to the value
of Fund shares which will vary in response to interest rate fluctuations and
other market and credit factors. In addition, the Fund may invest in bills,
notes and bonds issued by the U.S. Treasury. Income from U.S. Government
mortgage-backed securities may be lower than that from longer-term lower quality
securities.
The market value of the Fund's investments and correspondingly the
Fund's share price will vary inversely with changes in prevailing interest rates
and in response to other bond market factors, such as changes in the supply and
demand for mortgage-backed securities. Income from U.S. Government
mortgage-backed securities may be lower than that from longer-term lower quality
securities.
The Fund may make long-term investments but may also invest in short-
and intermediate-maturity investments and may engage in strategic transactions.
Under certain market conditions, these strategies may reduce current income. At
any time, the Fund may have a substantial portion of its assets in securities of
a particular type or maturity. The Fund may invest in U.S. Treasury bills,
notes, and bonds; GNMA securities; options on such securities; futures
contracts; repurchase agreements and dollar roll transactions fully secured by
U.S. Government obligations; reverse repurchase agreements, warrants, zero
coupon securities; when-issued securities; illiquid securities; and cash
equivalents. The Fund may also engage in strategic transactions.
Some investors may view the Fund as an alternative to a bank
certificate of deposit ("CD"). While an investment in the Fund is not federally
insured, and there is no guarantee of price stability, an investment in the Fund
- -- unlike a CD -- is not locked away for any period, may be redeemed at any time
without incurring early withdrawal penalties, and may provide a higher yield.
The unique characteristics of GNMA securities may cause the Fund to
experience greater price and yield volatility than other bond funds under
certain market conditions. When interest rates rise, homeowners tend to prepay
their mortgages at slower rates, thus lengthening the life of the
mortgage-backed securites. Longer term securites tend to fluctuate more widely
in response to changes in interest rates, so the Fund may experience increased
share price volatility. When interest rates fall, homeowners are more likely to
refinance their home mortgages. An increase in prepayments can have two
significant effects on the Fund. The Fund's overall level of income may be
reduced because the Fund must reinvest the additional prepayments at lower
interest rates, and the value of the mortgage-backed securites in the Fund may
not appreciate as rapidly as other comparable long-term bonds.
<PAGE>
At least 65% of the Fund's total assets will be invested in
mortgage-backed securities issued or guaranteed by GNMA (which are backed by the
full faith and credit of the U.S. Government). Up to 35% of the Fund's total
assets may be held in cash, cash equivalents or invested in securities issued or
directly guaranteed by the U.S. Government, including U.S. Treasury bills, notes
and bonds. As used in this Statement of Additional Information, the term "U.S.
Government securities" refers to the following securities: (1) securities issued
and backed by the full faith and credit of the U.S. Government, including U.S.
Treasury bills, notes and bonds; and (2) securities issued by an agency or
instrumentality of the U.S. Government and backed by the full faith and credit
of the U.S. Government, including but not limited to securities of the
Export-Import Bank of the United States, the General Services Administration and
the Washington Metropolitan Area Transit Authority.
During periods which, in the opinion of the Fund's investment adviser,
Scudder Kemper Investments, Inc. (the "Adviser"), require defensive investing,
the Fund may temporarily invest its assets without limit in short-term U.S.
Government obligations. It is impossible to accurately predict for how long such
alternate strategies may be utilized.
The Fund cannot guarantee a gain or eliminate the risk of loss. The net
asset value of the Fund's shares may increase or decrease with changes in the
market prices of the Fund's investments and there is no assurance that the
Fund's objective will be achieved. Except as otherwise indicated, the Fund's
investment objective and policies are not fundamental and may be changed by the
Board of Trustees without a vote of shareholders.
Master/feeder structure
The Board of Trustees has the discretion to retain the current
distribution arrangement for the Fund while investing in a master/feeder fund
structure as described below.
A master/feeder fund structure is one in which a fund (a "feeder
fund"), instead of investing directly in a portfolio of securities, invests most
or all of its investment assets in a separate registered investment company (the
"master fund") with substantially the same investment objective and policies as
the feeder fund. Such a structure permits the pooling of assets of two or more
feeder funds, preserving separate identities or distribution channels at the
feeder fund level. Based on the premise that certain of the expenses of
operating an investment portfolio are relatively fixed, a larger investment
portfolio may eventually achieve a lower ratio of operating expenses to average
net assets. An existing investment company is able to convert to a feeder fund
by selling all of its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or loss, or by contributing
its assets to the master fund and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable gain or loss.
Investments and Investment Techniques
GNMA Mortgage-Backed Securities ("GNMAs"). GNMAs are mortgage-backed securities
representing pro rata ownership of a pool of mortgage loans. These loans, which
are issued by lenders such as mortgage bankers, commercial banks, and savings
and loan associations, are either insured by the Federal Housing Administration
(FHA) or guaranteed by the Veterans Administration (VA). A "pool", or group of
mortgages, is assembled and after being approved by GNMA, a U.S. Government
agency within the U.S. Department of Housing and Urban Development, the timely
payment of interest and principal is guaranteed by the full faith and credit of
the U.S. Government.
As mortgage-backed securities, GNMAs differ from many bonds in that
principal is paid back by the borrower over the life of the security rather than
returned in a lump sum at maturity. GNMAs are called "pass-through" securities
because both interest and principal, including prepayments, are passed through
to the holder of the security (in this case, the Fund). Because principal may be
prepaid at any time, mortgage-backed securities may involve significantly
greater price and yield volatility than traditional debt securities.
The payment of principal on the underlying mortgages may exceed the
minimum required by the schedule of payments for the mortgages. Such prepayments
are made at the option of the mortgagors for a wide variety of reasons
reflecting their individual circumstances and may result in capital losses to
the Fund if the mortgages were purchased at a premium. For example, mortgagors
may speed up the rate at which they prepay their mortgages when interest rates
decline sufficiently to encourage refinancing. The Fund, when such prepayments
are passed through to it, may be able to reinvest them only at a lower rate of
interest. When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
volatility, affecting the price volatility of the
2
<PAGE>
Fund's shares. The Adviser, in determining the relative attractiveness of GNMAs
compared to alternative fixed-income securities, and in choosing specific GNMA
issues, will have made assumptions as to the likely speed of prepayment. Actual
experience may vary from these assumptions, resulting in a higher or lower
investment return than anticipated.
Dollar Roll Transactions. The Fund may enter into "dollar roll" transactions,
which consist of the sale by the Fund to a bank or broker/dealer (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date, at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on the
security while it is the holder. The Fund receives compensation from the
counterparty as consideration for entering into the commitment to repurchase.
The compensation is paid in the form of a fee or alternatively, a lower price
for the security upon its repurchase. Dollar rolls may be renewed over a period
of several months with a different repurchase price and a cash settlement made
at each renewal without physical delivery of securities. Moreover, the
transaction may be preceded by a firm commitment agreement pursuant to which the
Fund agrees to buy a security on a future date.
The Fund will not use such transactions for leveraging purposes and,
accordingly, will segregate cash or liquid assets in an amount sufficient to
meet its purchase obligations under the transactions. The Fund will also
maintain asset coverage of at least 300% for all outstanding firm commitments,
dollar rolls and certain other borrowings. Notwithstanding such safeguards, the
Fund's overall investment exposure may be increased by such transactions to the
extent that the Fund bears a risk of loss on the securities it is committed to
purchase as well as on the segregated assets.
Dollar rolls are treated for purposes of the Investment Company Act of
1940, as amended (the "1940 Act"), as borrowings of the Fund because they
involve the sale of a security coupled with an agreement to repurchase. Like all
borrowings, a dollar roll involves costs to the Fund. For example, while the
Fund receives either a fee or alternatively, a lower price for the security upon
its repurchase as consideration for agreeing to repurchase the security, the
Fund forgoes the right to receive all principal and interest payments while the
counterparty holds the security. These payments to the counterparty may exceed
the fee received by the Fund, thereby effectively charging the Fund interest on
its borrowing. Further, although the Fund can estimate the amount of expected
principal prepayment over the term of the dollar roll, a variation in the actual
amount of prepayment could increase or decrease the cost of the Fund's
borrowing.
The entry into dollar rolls involves potential risks of loss which are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the value of such
securities may change adversely before the Fund is able to purchase them.
Similarly, the Fund may be required to purchase securities in connection with a
dollar roll at a higher price than may otherwise be available on the open
market. Since, as noted above, the counterparty is required to deliver a
similar, but not identical security to the Fund, the security which the Fund is
required to buy under the dollar roll may be worth less than an identical
security. Finally, there can be no assurance that the Fund's use of the cash
that it receives from a dollar roll will provide a return that exceeds borrowing
costs.
The Trustees of the Fund have adopted guidelines to ensure that those
securities received are substantially identical to those sold. To reduce the
risk of default, the Fund will engage in such transactions only with banks and
broker/dealers selected pursuant to such guidelines.
Reverse Repurchase Agreements. The Fund may enter into "reverse repurchase
agreements," which are repurchase agreements in which the Fund, as the seller of
the securities, agrees to repurchase them at an agreed time and price. The Fund
maintains a segregated account in connection with outstanding reverse repurchase
agreements. The Fund will enter into reverse repurchase agreements only when the
Adviser believes that the interest income to be earned from the investment of
the proceeds of the transaction will be greater than the interest expense of the
transaction.
Warrants. The Fund may invest in warrants up to 5% of the value of its total
assets. The holder of a warrant has the right, until the warrant expires, to
purchase a given number of shares of a particular issuer at a specified price.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move, however, in tandem with the prices of the underlying
securities and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by the Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant.
3
<PAGE>
Lending of Portfolio Securities. The Fund may seek to increase its income by
lending portfolio securities. Such loans may be made to registered
broker/dealers, and are required to be secured continuously by collateral in
cash or liquid assets, maintained on a current basis at an amount at least equal
to the market value and accrued interest of the securities loaned. The Fund has
the right to call a loan and obtain the securities loaned on no more than five
days' notice. During the existence of a loan, the Fund continues to receive the
equivalent of any distributions paid by the issuer on the securities loaned and
also receive compensation based on investment of the collateral. As with other
extensions of credit there are risks of delay in recovery or even loss of rights
in the collateral should the borrower of the securities fail financially.
However, the loans may be made only to firms deemed by the Adviser to be of good
standing. The value of the securities loaned will not exceed 5% of the value of
the Fund's total assets at the time any loan is made.
When-Issued Securities. The Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which is
generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer and
no interest accrues to the purchaser. To the extent that assets of the Fund are
not invested prior to the settlement of a purchase of securities, a Fund will
earn no income; however, it is intended that the Fund will be fully invested to
the extent practicable and subject to the policies stated herein. When-issued or
forward delivery purchases are negotiated directly with the other party, and are
not traded on an exchange. While when-issued or forward delivery securities may
be sold prior to the settlement date, it is intended that the Fund will purchase
such securities with the purpose of actually acquiring them unless a sale
appears desirable for investment reasons. At the time the Fund makes the
commitment to purchase securities on a when-issued or forward delivery basis, it
will record the transaction and reflect the value of the security in determining
its net asset value. The Fund does not believe that its net asset value or
income will be adversely affected by its purchase of securities on a when-issued
or forward delivery basis. The Fund will establish a segregated account with the
Fund's custodian in which it will maintain cash or liquid assets equal in value
to commitments for when-issued or forward delivery securities. Such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date. The Fund will not enter into such transactions for leveraging
purposes.
Illiquid Securities. The Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable," i.e.,
securities which cannot be sold to the public without registration under the
Securities Act of 1933, as amended (the "1933 Act"), or the availability of an
exemption from registration (such as Rule 144A) or because they are subject to
other legal or contractual delays in or restrictions on resale. This investment
practice, therefore, could have the effect of increasing the level of
illiquidity of the Fund. It is the Fund's policy that illiquid securities
(including repurchase agreements of more than seven days duration, certain
restricted securities, and other securities which are not readily marketable)
may not constitute, at the time of purchase, more than 15% of the value of the
Fund's net assets. The Trust's Board of Trustees has approved guidelines for use
by the Adviser in determining whether a security is illiquid.
Generally speaking, restricted securities may be sold (i) only to
qualified institutional buyers; (ii) in a privately negotiated transaction to a
limited number of purchasers; or (iii) in limited quantities after they have
been held for a specified period of time and other conditions are met pursuant
to an exemption from registration. Issuers of restricted securities may not be
subject to the disclosure and other investor protection requirements that would
be applicable if their securities were publicly traded. If adverse market
conditions were to develop during the period between the Fund's decision to sell
a restricted or illiquid security and the point at which the Fund is permitted
or able to sell such security, the Fund might obtain a price less favorable than
the price that prevailed when it decided to sell. Where a registration statement
is required for the resale of restricted securities, the Fund may be required to
bear all or part of the registration expenses. The Fund may be deemed to be an
"underwriter" for purposes of the 1933 Act when selling restricted securities to
the public and, in such event, the Fund may be liable to purchasers of such
securities if the registration statement prepared by the issuer is materially
inaccurate or misleading.
Repurchase Agreements. The Fund may enter into repurchase agreements with any
member bank of the Federal Reserve System and any broker/dealer which is
recognized as a reporting government securities dealer if the creditworthiness
of the bank or broker/dealer has been determined by the Adviser to be at least
as high as that of other obligations the Fund may purchase or to be at least
equal to that of issuers of commercial paper rated within the two highest grades
assigned by Moody's Investor Services, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P").
4
<PAGE>
A repurchase agreement provides a means for the Fund to earn income on
funds for periods as short as overnight. It is an arrangement under which the
Purchaser (i.e., the Fund) acquires a security ("Obligation") and the seller
agrees, at the time of sale, to repurchase the Obligation at a specified time
and price. Securities subject to a repurchase agreement are held in a segregated
account and the value of such securities is kept at least equal to the
repurchase price on a daily basis. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Fund together with the repurchase price on the date of repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the Obligation
itself. Obligations will be held by the Fund's custodian or in the Federal
Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the Fund to the seller of the Obligation subject to the repurchase
agreement and is therefore subject to the Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
Obligation purchased by the Fund subject to a repurchase agreement as being
owned by the Fund or as being collateral for a loan by the Fund to the seller.
In the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Fund may encounter delay and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the Obligation,
the Fund may be required to return the Obligation to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, the
Fund would be at the risk of losing some or all of the principal and income
involved in the transaction. As with unsecured debt obligations purchased for
the Fund, the Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the Obligation. Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the
Obligation. However, if the market value of the Obligation subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Fund will direct the seller of the Obligation to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement will equal or exceed the repurchase price. It is possible
that the Fund will be unsuccessful in seeking to impose on the seller a
contractual obligation to deliver additional securities.
Zero Coupon Securities. The Fund may invest in zero coupon securities which pay
no cash income and are sold at substantial discounts from their value at
maturity. When held to maturity, their entire income, which consists of
accretion of discount, comes from the difference between the issue price and
their value at maturity. Zero coupon securities are subject to greater market
value fluctuations from changing interest rates than debt obligations of
comparable maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation as
increases (or decreases) in market value of such securities closely follow the
movements in the market value of the underlying common stock. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with short maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRS") and Certificate of Accrual on Treasuries
("CATS"). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes, in
their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holders of the underlying U.S.
Government securities.
The Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
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<PAGE>
Reserve book-entry record-keeping system. The Federal Reserve program, as
established by the Treasury Department, is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Fund will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S. Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold in such bundled form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells.
(See "TAXES.")
Strategic Transactions and Derivatives. The Fund may, but is not required to,
utilize various other investment strategies as described below for a variety of
purposes, such as, hedging various market risks, managing the effective maturity
or duration of the Fund's portfolio, or enhancing potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other instruments, purchase and
sell futures contracts and options thereon, enter into various transactions such
as swaps, caps, floors or collars, currency forward contracts, currency futures
contracts, currency swaps or options on currencies, or currency futures and
various other currency transactions (collectively, all the above are called
"Strategic Transactions"). In addition, strategic transactions may also include
new techniques, instruments or strategies that are permitted as regulatory
changes occur. Strategic Transactions may be used without limit to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
substitute for purchasing or selling particular securities. Some Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of the Fund's assets will be committed to Strategic Transactions entered into
for non-hedging purposes. Any or all of these investment techniques may be used
at any time and in any combination, and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions will not be used to alter the fundamental investment purposes and
characteristics of a Fund and each Fund will segregate assets (or as provided by
applicable regulations, enter into certain offsetting positions) to cover its
obligations under options, futures and swaps to limit leveraging of a Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Fund, force the sale or
purchase of portfolio securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would
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purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically have
similar structural characteristics and operational mechanics regardless of the
underlying instrument on which they are purchased or sold. Thus, the following
general discussion relates to each of the particular types of options discussed
in greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
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Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make or take delivery of the security or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers," or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or are determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission (the
"SEC") currently takes the position that OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including
U.S. Treasury and agency securities, mortgage-backed securities and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in
over-the-counter markets, and on securities indices and futures contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities, including
U.S. Treasury and agency securities (whether or not it holds the above
securities in its portfolio) and on securities indices and futures contracts
other than futures on individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
General Characteristics of Futures. The Fund may enter into futures contracts or
purchase or sell put and call options on such futures as a hedge against
anticipated interest rate, currency or equity market changes, and for duration
management, risk management, and return enhancement purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed,
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging, risk management (including duration management) or
other portfolio and return enhancement management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a
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futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur.
The Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of the Fund's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Combined Transactions. The Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
interest rate transactions and any combination of futures, options and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Fund may enter are interest rate, index and other swaps and the purchase or sale
of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch each Fund will segregate
assets (or enter into any offsetting position) to cover obligations under swaps,
the Adviser and the Funds believe such obligations do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to its borrowing restrictions. The Fund will not enter into any swap,
cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or
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Moody's or has an equivalent rating from an NRSRO or is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or options
thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate cash or liquid
assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid assets at least equal to
the current amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or a convertible into the needed securities
without additional consideration) or to segregate cash or liquid assets
sufficient to purchase and deliver the securities if the call is exercised. A
call option sold by the Fund on an index will require the Fund to own portfolio
securities which correlate with the index or to segregate cash or liquid assets
equal to the excess of the index value over the exercise price on a current
basis. A put option written by the Fund requires the Fund to segregate cash or
liquid assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of cash or liquid
assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement and the Fund will segregate an
amount of cash or liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
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Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if the
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
Investment Restrictions
Unless specified to the contrary, the following restrictions are
fundamental policies and may not be changed without the approval of a majority
of the outstanding voting securities of the Fund which, under the 1940 Act and
the rules thereunder and as used in this Statement of Additional Information,
means the lesser of (1) 67% or more of the voting securities present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund are present or represented by proxy; or (2) more than 50% of the
outstanding voting securities of the Fund.
Any investment restrictions herein which involve a maximum percentage
of securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an acquisition
or encumbrance of securities or assets of, or borrowings by, the Fund.
The Fund has elected to be classified as a diversified open-end
management investment company. In addition, as a matter of fundamental policy,
the Fund may not:
(1) borrow money, except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction from time to time;
(2) issue senior securities, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted
or modified by regulatory authority having jurisdiction from
time to time;
(3) purchase physical commodities or contracts relating to
physical commodities;
(4) engage in the business of underwriting securities issued by
others, except to the extent that the Fund may be deemed to be
an underwriter in connection with the disposition of portfolio
securities;
(5) purchase or sell real estate, which term does not include
securities of companies which deal in real estate or mortgages
or investments secured by real estate or interests therein,
except that the Fund reserves freedom of action to hold and to
sell real estate acquired as a result of the Fund's ownership
of securities;
(6) make loans except as permitted under the Investment Company
Act of 1940, as amended, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time.
(7) concentrate its investments in a particular industry, as that
term is used in the Investment Company Act of 1940, as
amended, and as interpreted or modified by regulatory
authority having jurisdiction from time to time.
Nonfundamental policies may be changed without shareholder approval.
The Fund does not intend to, as a nonfundamental policy:
(1) borrow money in an amount greater than 5% of its total assets,
except (i) for temporary or emergency purposes and (ii) by
engaging in reverse repurchase agreements, dollar rolls, or
other investments or transactions described in the Fund's
registration statement which may be deemed to be borrowings;
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<PAGE>
(2) purchase securities on margin or make short sales, except (i)
short sales against the box, (ii) in connection with arbitrage
transactions, (iii) for margin deposits in connection with
futures contracts, options or other permitted investments,
(iv) that transactions in futures contracts and options shall
not be deemed to constitute selling securities short, and (v)
that the Fund may obtain such short-term credits as may be
necessary for the clearance of securities transactions;
(3) purchase options, unless the aggregate premiums paid on all
such options held by the Fund at any time do not exceed 20% of
its total assets; or sell put options, if as a result, the
aggregate value of the obligations underlying such put options
would exceed 50% of its total assets;
(4) enter into futures contracts or purchase options thereon
unless immediately after the purchase, the value of the
aggregate initial margin with respect to such futures
contracts entered into on behalf of the Fund and the premiums
paid for such options on futures contracts does not exceed 5%
of the fair market value of the Fund's total assets; provided
that in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount may be excluded in
computing the 5% limit;
(5) purchase warrants if as a result, such securities, taken at
the lower of cost or market value, would represent more than
5% of the value of the Fund's total assets (for this purpose,
warrants acquired in units or attached to securities will be
deemed to have no value); and
(6) lend portfolio securities in an amount greater than 5% of its
total assets.
PURCHASES
(See "How to Buy Shares" in the Fund's prospectus.)
Additional Information About Opening An Account
Clients having a regular investment counsel account with the Adviser or
its affiliates and members of their immediate families, officers and employees
of the Adviser or of any affiliated organization and their immediate families,
members of the National Association of Securities Dealers, Inc. ("NASD") and
banks may, if they prefer, subscribe initially for at least $2,500 of Fund
shares through Scudder Investor Services, Inc. (the "Distributor") by letter,
fax, TWX, or telephone.
Shareholders of other Scudder funds who have submitted an account
application and have a certified Tax Identification Number, clients having a
regular investment counsel account with the Adviser or its affiliates and
members of their immediate families, officers and employees of the Adviser or of
any affiliated organization and their immediate families, members of the NASD,
and banks may open an account by wire. These investors must call 1-800-225-5163
to get an account number. During the call, the investor will be asked to
indicate the Fund name, amount to be wired ($2,500 minimum), name of bank or
trust company from which the wire will be sent, the exact registration of the
new account, the taxpayer identification or Social Security number, address and
telephone number. The investor must then call the bank to arrange a wire
transfer to The Scudder Funds, State Street Bank and Trust Company, Boston, MA
02110, ABA Number 011000028, DDA Account Number: 9903-5552. The investor must
give the Scudder fund name, account name and the new account number. Finally,
the investor must send the completed and signed application to the Fund
promptly.
The minimum initial purchase amount is less than $2,500 under certain
special plan accounts.
Minimum balances
Shareholders should maintain a share balance worth at least $2,500
($1,000 for fiduciary accounts such as IRAs, and custodial accounts such as
Uniform Gift to Minor Act, and Uniform Trust to Minor Act accounts), which
amount may be changed by the Board of Trustees. A shareholder may open an
account with at least $1,000 ($500 for fiduciary/custodial accounts), if an
automatic investment plan (AIP) of $100/month ($50/month for fiduciary/custodial
accounts) is established. Scudder group retirement plans and certain other
accounts have similar or lower minimum share balance requirements.
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The Fund reserves the right, following 60 days' written notice to
applicable shareholders, to:
o assess an annual $10 per Fund charge (with the fee to be paid to the
Fund) for any non-fiduciary/non-custodial account without an automatic
investment plan (AIP) in place and a balance of less than $2,500; and
o redeem all shares in Fund accounts below $1,000 where a reduction in
value has occurred due to a redemption, exchange or transfer out of the
account. The Fund will mail the proceeds of the redeemed account to the
shareholder.
Reductions in value that result solely from market activity will not
trigger an involuntary redemption. Shareholders with a combined household
account balance in any of the Scudder Funds of $100,000 or more, as well as
group retirement and certain other accounts will not be subject to a fee or
automatic redemption.
Fiduciary (e.g., IRA or Roth IRA) and custodial accounts (e.g., UGMA or
UTMA) with balances below $100 are subject to automatic redemption following 60
days' written notice to applicable shareholders.
Additional Information About Making Subsequent Investments
Subsequent purchase orders for $10,000 or more and for an amount not
greater than four times the value of the shareholder's account may be placed by
telephone, fax, etc. by established shareholders (except by Scudder Individual
Retirement Account (IRA), Scudder Horizon Plan, Scudder Profit Sharing and Money
Purchase Pension Plans, Scudder 401(k) and Scudder 403(b) Plan holders), members
of the NASD, and banks. Orders placed in this manner may be directed to any
office of the Distributor listed in the Fund's prospectus. A confirmation of the
purchase will be mailed out promptly following receipt of a request to buy.
Federal regulations require that payment be received within three business days.
If payment is not received within that time, the order is subject to
cancellation. In the event of such cancellation or cancellation at the
purchaser's request, the purchaser will be responsible for any loss incurred by
the Fund or the principal underwriter by reason of such cancellation. If the
purchaser is a shareholder, the Trust shall have the authority, as agent of the
shareholder, to redeem shares in the account in order to reimburse the Fund or
the principal underwriter for the loss incurred. Net losses on such transactions
which are not recovered from the purchaser will be absorbed by the principal
underwriter. Any net profit on the liquidation of unpaid shares will accrue to
the Fund.
Additional Information About Making Subsequent Investments by QuickBuy
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickBuy program, may purchase shares of the Fund by telephone. Through
this service shareholders may purchase up to $250,000. To purchase shares by
QuickBuy, shareholders should call before the close of regular trading on the
New York Stock Exchange, Inc. (the "Exchange"), normally 4 p.m. eastern time.
Proceeds in the amount of your purchase will be transferred from your bank
checking account two or three business days following your call. For requests
received by the close of regular trading on the Exchange, shares will be
purchased at the net asset value per share calculated at the close of trading on
the day of your call. QuickBuy requests received after the close of regular
trading on the Exchange will begin their processing and be purchased at the net
asset value calculated the following business day. If you purchase shares by
QuickBuy and redeem them within seven days of the purchase, the Fund may hold
the redemption proceeds for a period of up to seven business days. If you
purchase shares and there are insufficient funds in your bank account the
purchase will be canceled and you will be subject to any losses or fees incurred
in the transaction. QuickBuy transactions are not available for most retirement
plan accounts. However, QuickBuy transactions are available for Scudder IRA
accounts.
In order to request purchases by QuickBuy, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account from which the purchase payment will be debited.
New investors wishing to establish QuickBuy may so indicate on the application.
Existing shareholders who wish to add QuickBuy to their account may do so by
completing a QuickBuy Enrollment Form. After sending in an enrollment form,
shareholders should allow 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable
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<PAGE>
for losses due to unauthorized or fraudulent telephone instructions. The Fund
will not be liable for acting upon instructions communicated by telephone that
it reasonably believes to be genuine.
Checks
A certified check is not necessary, but checks are only accepted
subject to collection at full face value in U.S. funds and must be drawn on, or
payable through, a U.S. bank.
If shares of the Fund are purchased by a check which proves to be
uncollectible, the Trust reserves the right to cancel the purchase immediately
and the purchaser will be responsible for any loss incurred by the Trust or the
principal underwriter by reason of such cancellation. If the purchaser is a
shareholder, the Trust will have the authority, as agent of the shareholder, to
redeem shares in the account in order to reimburse the Fund or the principal
underwriter for the loss incurred. Investors whose orders have been canceled may
be prohibited from, or restricted in, placing future orders in any of the
Scudder funds.
Wire Transfer of Federal Funds
To obtain the net asset value determined as of the close of regular
trading on the Exchange on a selected day, your bank must forward federal funds
by wire transfer and provide the required account information so as to be
available to the Fund prior to the close of regular trading on the Exchange
(normally 4 p.m. eastern time).
The bank sending an investor's federal funds by bank wire may charge
for the service. Presently, the Distributor pays a fee for receipt by State
Street Bank and Trust Company (the "Custodian") of "wired funds," but the right
to charge investors for this service is reserved.
Boston banks are closed on certain holidays although the Exchange may
be open. These holidays include Columbus Day (the 2nd Monday in October) and
Veterans Day (November 11). Investors are not able to purchase shares by wiring
federal funds on such holidays because the Custodian is not open to receive such
federal funds on behalf of the Fund.
Share Price
Purchases will be filled without sales charge at the net asset value
next computed after receipt of the application in good order. Net asset value
normally will be computed as of the close of regular trading on each day during
which the Exchange is open for trading. Orders received after the close of
regular trading on the Exchange will receive the next business day's net asset
value. If the order has been placed by a member of the NASD, other than the
Distributor, it is the responsibility of that member broker, rather than the
Fund, to forward the purchase order to Scudder Service Corporation (the
"Transfer Agent") by the close of regular trading on the Exchange.
Share Certificates
Due to the desire of the Trust's management to afford ease of
redemption, certificates will not be issued to indicate ownership in the Fund.
Share certificates now in a shareholder's possession may be sent to the Transfer
Agent for cancellation and credit to such shareholder's account. Shareholders
who prefer may hold the certificates in their possession until they wish to
exchange or redeem such shares.
Other Information
The Fund has authorized certain members of the NASD other than the
Distributor to accept purchase and redemption orders for the Fund's shares.
Those brokers may also designate other parties to accept purchase and redemption
orders on the Fund's behalf. Orders for purchase or redemption will be deemed to
have been received by the Fund when such brokers or their authorized designees
accept the orders. Subject to the terms of the contract between the Fund and the
broker, ordinarily orders will be priced at the Fund's net asset value next
computed after acceptance by such brokers or their authorized designees.
Further, if purchases or redemptions of the Fund's shares are arranged and
settlement is made at an investor's election through any other authorized NASD
member, that member may, at its discretion, charge a fee for that service. The
Board of Trustees and the Distributor, also the Fund's principal
14
<PAGE>
underwriter, each has the right to limit the amount of purchases by, and to
refuse to sell to, any person. The Trustees and the Distributor may suspend or
terminate the offering of shares of the Fund at any time for any reason.
The Board of Trustees and the Distributor each has the right to limit,
for any reason, the amount of purchases by, and to refuse to, sell to any
person, and each may suspend or terminate the offering of shares of the Fund at
any time for any reasons.
The Tax Identification Number section of the application must be
completed when opening an account. Applications and purchase orders without a
correct certified tax identification number and certain other certified
information (e.g. from exempt organizations, certification of exempt status)
will be returned to the investor. The Fund reserves the right, following 30
days' notice, to redeem all shares in accounts without a correct certified
Social Security or tax identification number. A shareholder may avoid
involuntary redemption by providing the Fund with a tax identification number
during the 30-day notice period.
The Trust may issue shares at net asset value in connection with any
merger or consolidation with, or acquisition of the assets of, any investment
company or personal holding company, subject to the requirements of the 1940
Act.
EXCHANGES AND REDEMPTIONS
(See "How to Sell or Exchange Shares" in a Fund's prospectus.)
Exchanges
Exchanges are comprised of a redemption from one Scudder fund and a
purchase into another Scudder fund. The purchase side of the exchange either may
be an additional investment into an existing account or may involve opening a
new account in the other fund. When an exchange involves a new account, the new
account will be established with the same registration, tax identification
number, address, telephone redemption option, "Scudder Automated Information
Line" (SAIL) transaction authorization and dividend option as the existing
account. Other features will not carry over automatically to the new account.
Exchanges into a new fund account must be for a minimum of $2,500. When an
exchange represents an additional investment into an existing account, the
account receiving the exchange proceeds must have identical registration,
address, and account options/features as the account of origin. Exchanges into
an existing account must be for $100 or more. If the account receiving the
exchange proceeds is to be different in any respect, the exchange request must
be in writing and must contain a signature guarantee as described under
"Policies You Should Know About -- Signature guarantees" in a Fund's prospectus.
Exchange orders received before the close of regular trading on the
Exchange on any business day ordinarily will be executed at the respective net
asset values determined on that day. Exchange orders received after the close of
regular trading on the Exchange will be executed on the following business day.
Investors may also request, at no extra charge, to have exchanges
automatically executed on a predetermined schedule from one Scudder fund to an
existing account in another Scudder fund, at current net asset value, through
Scudder's Automatic Exchange Program. Exchanges must be for a minimum of $50.
Shareholders may add this free feature over the telephone or in writing.
Automatic Exchanges will continue until the shareholder requests by telephone or
in writing to have the feature removed, or until the originating account is
depleted. The Trust and the Transfer Agent each reserves the right to suspend or
terminate the privilege of the Automatic Exchange Program at any time.
There is no charge to the shareholder for any exchange described above.
An exchange into another Scudder fund is a redemption of shares, and therefore
may result in tax consequences (gain or loss) to the shareholder, and the
proceeds of such an exchange may be subject to backup withholding. (See
"TAXES.")
Investors currently receive the exchange privilege, including exchange
by telephone, automatically without having to elect it. The Fund employs
procedures, including recording telephone calls, testing a caller's identity,
and sending written confirmation of telephone transactions, designed to give
reasonable assurance that instructions communicated by telephone are genuine,
and to discourage fraud. To the extent that the Fund does not follow such
15
<PAGE>
procedures, it may be liable for losses due to unauthorized or fraudulent
telephone instructions. The Fund will not be liable for acting upon instructions
communicated by telephone that it reasonably believes to be genuine. The Fund
and the Transfer Agent each reserves the right to suspend or terminate the
privilege of exchanging by telephone or fax at any time.
The Scudder funds into which investors may make an exchange are listed
under "THE SCUDDER FAMILY OF FUNDS" herein. Before making an exchange,
shareholders should obtain from Scudder Investor Services, Inc. a prospectus of
the Scudder fund into which the exchange is being contemplated. The exchange
privilege may not be available for certain Scudder funds or classes thereof. For
more information call 1-800-225-5163.
Scudder retirement plans may have different exchange requirements.
Please refer to appropriate plan literature.
Redemption by Telephone
In order to request redemptions by telephone, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which the redemption proceeds are to be sent.
Shareholders currently receive the right to redeem up to $100,000 to their
address of record automatically, without having to elect it. Shareholders may
also request to have the proceeds mailed or wired to their pre-designated bank
account.
(a) NEW INVESTORS wishing to establish telephone redemption to a
pre-designated bank account must complete the appropriate
section on the application.
(b) EXISTING SHAREHOLDERS (except those who are Scudder IRA,
Scudder Pension and Profit-Sharing, Scudder 401(k) and Scudder
403(b) Planholders) who wish to establish telephone redemption
to a pre-designated bank account or who want to change the
bank account previously designated to receive redemption
payments should either return a Telephone Redemption Option
Form (available upon request) or send a letter identifying the
account and specifying the exact information to be changed.
The letter must be signed exactly as the shareholder's name(s)
appears on the account. A signature and a signature guarantee
are required for each person in whose name the account is
registered.
Telephone redemption is not available with respect to shares
represented by share certificates or shares held in certain retirement accounts.
If a request for redemption to a shareholder's bank account is made by
telephone or fax, payment will be by Federal Reserve bank wire to the bank
account designated on the application, unless a request is made that the
redemption check be mailed to the designated bank account. There will be a $5
charge for all wire redemptions.
Note: Investors designating a savings bank to receive their
telephone redemption proceeds are advised that if the savings
bank is not a participant in the Federal Reserve System,
redemption proceeds must be wired through a commercial bank
which is a correspondent of the savings bank. As this may
delay receipt by the shareholder's account, it is suggested
that investors wishing to use a savings bank discuss wire
procedures with their bank and submit any special wire
transfer information with the telephone redemption
authorization. If appropriate wire information is not
supplied, redemption proceeds will be mailed to the designated
bank.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption requests by telephone (technically a repurchase by agreement
between the Fund and the shareholder) of shares purchased by check will not be
accepted until the purchase check has cleared.
16
<PAGE>
Redemption by QuickSell
Shareholders, whose predesignated bank account of record is a member of
the Automated Clearing House Network (ACH) and who have elected to participate
in the QuickSell program may sell shares of the Fund by telephone. Redemptions
must be for at least $250. Proceeds in the amount of your redemption will be
transferred to your bank checking account two or three business days following
your call. For requests received by the close of regular trading on the
Exchange, normally 4 p.m. eastern time, shares will be redeemed at the net asset
value per share calculated at the close of trading on the day of your call.
QuickSell requests received after the close of regular trading on the Exchange
will begin their processing and be redeemed at the net asset value calculated
the following business day. QuickSell transactions are not available for Scudder
IRA accounts and most other retirement plan accounts.
In order to request redemptions by QuickSell, shareholders must have
completed and returned to the Transfer Agent the application, including the
designation of a bank account to which the redemption proceeds will be credited.
New investors wishing to establish QuickSell may so indicate on the application.
Existing shareholders who wish to add QuickSell to their account may do so by
completing a QuickSell Enrollment Form. After sending in an enrollment form,
shareholders should allow for 15 days for this service to be available.
The Fund employs procedures, including recording telephone calls,
testing a caller's identity, and sending written confirmation of telephone
transactions, designed to give reasonable assurance that instructions
communicated by telephone are genuine, and to discourage fraud. To the extent
that the Fund does not follow such procedures, it may be liable for losses due
to unauthorized or fraudulent telephone instructions. The Fund will not be
liable for acting upon instructions communicated by telephone that it reasonably
believes to be genuine.
Redemption by Mail or Fax
Any existing share certificates representing shares being redeemed must
accompany a request for redemption and be duly endorsed or accompanied by a
proper stock assignment form with a signature guarantee.
In order to ensure proper authorization before redeeming shares, the
Transfer Agent may request additional documents such as, but not restricted to,
stock powers, trust instruments, certificates of death, appointments as
executor, certificates of corporate authority and waivers of tax (required in
some states when settling estates).
It is suggested that shareholders holding share certificates or shares
registered in other than individual names contact the Transfer Agent prior to
any redemptions to ensure that all necessary documents accompany the request.
When shares are held in the name of a corporation, trust, fiduciary agent,
attorney or partnership, the Transfer Agent requires, in addition to the stock
power, certified evidence of authority to sign. These procedures are for the
protection of shareholders and should be followed to ensure prompt payment.
Redemption requests must not be conditional as to date or price of the
redemption. Proceeds of a redemption will be sent within seven business days
after receipt by the Transfer Agent of a request for redemption that complies
with the above requirements. Delays of more than seven days of payment for
shares tendered for repurchase or redemption may result, but only until the
purchase check has cleared.
The requirements for IRA redemptions are different from those for
regular accounts. For more information call 1-800-225-5163.
Other Information
If a shareholder redeems all shares in the account after the record
date of a dividend, the shareholder will receive, in addition to the net asset
value thereof, all declared but unpaid dividends thereon. The value of shares
redeemed or repurchased may be more or less than a shareholder's cost depending
upon the net asset value at the time of the redemption or repurchase. The Fund
does not impose a redemption or repurchase charge, although a wire charge may be
applicable for redemption proceeds wired to an investor's bank account.
Redemptions of shares, including redemptions undertaken to effect an exchange
for shares of another Scudder fund, may result in tax consequences (gain or
loss) to the shareholder and the proceeds of such redemptions may be subject to
backup withholding. (See "TAXES.")
Shareholders who wish to redeem shares from Special Plan Accounts
should contact the employer, trustee or custodian of the Plan for the
requirements.
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<PAGE>
The determination of net asset value may be suspended at times and a
shareholder's right to redeem shares and to receive payment therefore may be
suspended at times (a) during which the Exchange is closed, other than customary
weekend and holiday closings, (b) during which trading on the Exchange is
restricted for any reason, (c) during which an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during which the SEC by order permits a
suspension of the right of redemption or a postponement of the date of payment
or of redemption; provided that applicable rules and regulations of the SEC (or
any succeeding governmental authority) shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
FEATURES AND SERVICES OFFERED BY THE FUND
(See "How to invest in the funds" in a Fund's prospectus.)
The No-Load Concept
Investors are encouraged to be aware of the full ramifications of
mutual fund fee structures, and of how Scudder distinguishes its Scudder Family
of Funds from the vast majority of mutual funds available today. The primary
distinction is between load and no-load funds.
Load funds generally are defined as mutual funds that charge a fee for
the sale and distribution of fund shares. There are three types of loads:
front-end loads, back-end loads, and asset-based 12b-1 fees. 12b-1 fees are
distribution-related fees charged against fund assets and are distinct from
service fees, which are charged for personal services and/or maintenance of
shareholder accounts. Asset-based sales charges and service fees are typically
paid pursuant to distribution plans adopted under 12b-1 under the 1940 Act.
A front-end load is a sales charge, which can be as high as 8.50% of
the amount invested. A back-end load is a contingent deferred sales charge,
which can be as high as 8.50% of either the amount invested or redeemed. The
maximum front-end or back-end load varies, and depends upon whether or not a
fund also charges a 12b-1 fee and/or a service fee or offers investors various
sales-related services such as dividend reinvestment. The maximum charge for a
12b-1 fee is 0.75% of a fund's average annual net assets, and the maximum charge
for a service fee is 0.25% of a fund's average annual net assets.
A no-load fund does not charge a front-end or back-end load, but can
charge a small 12b-1 fee and/or service fee against fund assets. Under the
National Association of Securities Dealers Conduct Rules, a mutual fund can call
itself a "no-load" fund only if the 12b-1 fee and/or service fee does not exceed
0.25% of a fund's average annual net assets.
Because funds and classes in the Scudder Family of Funds do not pay any
asset-based sales charges or service fees, Scudder uses the phrase pure no-load
to distinguish Scudder funds and classes from other mutual funds. Scudder
pioneered the no-load concept when it created the nation's first no-load fund in
1928, and later developed the nation's first family of no-load mutual funds.
The following chart shows the potential long-term advantage of
investing $10,000 in a Scudder Family of Funds pure no-load fund over investing
the same amount in a load fund that collects an 8.50% front-end load, a load
fund that collects only a 0.75% 12b-1 and/or service fee, and a no-load fund
charging only a 0.25% 12b-1 and/or service fee. The hypothetical figures in the
chart show the value of an account assuming a constant 10% rate of return over
the time periods indicated and reinvestment of dividends and distributions.
<TABLE>
<CAPTION>
====================================================================================================================
No-Load Fund with
Years Scudder 8.50% Load Fund Load Fund with 0.75% 0.25% 12b-1
No-Load Fund 12b-1 Fee Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10 $ 25,937 $ 23,733 $ 24,222 $ 25,354
18
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
15 41,772 38,222 37,698 40,371
- --------------------------------------------------------------------------------------------------------------------
20 67,275 61,557 58,672 64,282
====================================================================================================================
</TABLE>
Internet access
World Wide Web Site -- The address of the Scudder Funds site is
http://www.scudder.com. The site offers guidance on global investing and
developing strategies to help meet financial goals and provides access to the
Scudder investor relations department via e-mail. The site also enables users to
access or view fund prospectuses and profiles with links between summary
information in Profiles and details in the Prospectus. Users can fill out new
account forms on-line, order free software, and request literature on funds.
The site is designed for interactivity, simplicity and maneuverability.
A section entitled "Planning Resources" provides information on asset
allocation, tuition, and retirement planning to users who fill out interactive
"worksheets." Investors can easily establish a "Personal Page," that presents
price information, updated daily, on funds they're interested in following. The
"Personal Page" also offers easy navigation to other parts of the site. Fund
performance data from both Scudder and Lipper Analytical Services, Inc. are
available on the site. Also offered on the site is a news feature, which
provides timely and topical material on the Scudder Funds.
The Adviser has communicated with shareholders and other interested
parties on Prodigy since 1988 and has participated since 1994 in GALT's Networth
"financial marketplace" site on the Internet. The firm made Scudder Funds
information available on America Online in early 1996.
Account Access -- The Adviser is among the first mutual fund families to allow
shareholders to manage their fund accounts through the World Wide Web. Scudder
Fund shareholders can view a snapshot of current holdings, review account
activity and move assets between Scudder Fund accounts.
The Adviser's personal portfolio capabilities -- known as SEAS (Scudder
Electronic Account Services) -- are accessible only by current Scudder Fund
shareholders who have set up a Personal Page on Scudder's Web site. Using a
secure Web browser, shareholders sign on to their account with their Social
Security number and their SAIL password. As an additional security measure,
users can change their current password or disable access to their portfolio
through the World Wide Web.
An Account Activity option reveals a financial history of transactions
for an account, with trade dates, type and amount of transaction, share price
and number of shares traded. For users who wish to trade shares between Scudder
Funds, the Fund Exchange option provides a step-by-step procedure to exchange
shares among existing fund accounts or to new Scudder Fund accounts.
A Call Me(TM) feature enables users to speak with a Scudder Investor
Relations telephone representative while viewing their account on the Web site.
In order to use the Call Me(TM) feature, an individual must have two phone lines
and enter on the screen the phone number that is not being used to connect to
the Internet. They are connected to the next available Scudder Investor
Relations representative from 8 a.m. to 8 p.m. eastern time.
Dividends and Capital Gains Distribution Options
Investors have freedom to choose whether to receive cash or to reinvest
any dividends from net investment income or distributions from realized capital
gains in additional shares of a Fund. A change of instructions for the method of
payment must be received by the Transfer Agent at least five days prior to a
dividend record date. Shareholders also may change their dividend option either
by calling 1-800-225-5163 or by sending written instructions to the Transfer
Agent. Please include your account number with your written request. See
"Purchases" in the Funds' prospectuses for the address.
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<PAGE>
Reinvestment is usually made at the closing net asset value determined
on the business day following the record date. Investors may leave standing
instructions with the Transfer Agent designating their option for either
reinvestment or cash distribution of any income dividends or capital gains
distributions. If no election is made, dividends and distributions will be
invested in additional shares of a Fund.
Investors may also have dividends and distributions automatically
deposited in their predesignated bank account through Scudder's
DistributionsDirect Program. Shareholders who elect to participate in the
DistributionsDirect Program, and whose predesignated checking account of record
is with a member bank of the Automated Clearing House Network (ACH) can have
income and capital gain distributions automatically deposited to their personal
bank account usually within three business days after the Fund pays its
distribution. A DistributionsDirect request form can be obtained by calling
1-800-225-5163. Confirmation statements will be mailed to shareholders as
notification that distributions have been deposited.
Investors choosing to participate in Scudder's Automatic Withdrawal
Plan must reinvest any dividends or capital gains. For most retirement plan
accounts, the reinvestment of dividends and capital gains is also required.
Scudder Investor Centers
Investors may visit any of the Investor Centers maintained by the
Distributor listed in the Funds' prospectuses. The Centers are designed to
provide individuals with services during any business day. Investors may pick up
literature or obtain assistance with opening an account, adding monies or
special options to existing accounts, making exchanges within the Scudder Family
of Funds, redeeming shares or opening retirement plans. Checks should not be
mailed to the Centers but should be mailed to "The Scudder Funds" at the address
listed under "Purchases" in the prospectuses.
Reports to Shareholders
The Trust issues shareholders unaudited semiannual financial statements
and annual financial statements audited by independent accountants, including a
list of investments held and statements of assets and liabilities, operations,
changes in net assets and financial highlights. The Trust presently intends to
distribute to shareholders informal quarterly reports during the intervening
quarters, containing a statement of the investments of the Funds.
Transaction Summaries
Annual summaries of all transactions in each Fund account are available
to shareholders. The summaries may be obtained by calling 1-800-225-5163.
THE SCUDDER FAMILY OF FUNDS
The Scudder Family of Funds is America's first family of mutual funds
and the nation's oldest family of no-load mutual funds. To assist investors in
choosing a Scudder fund, descriptions of the Scudder funds' objectives follow.
MONEY MARKET
Scudder U.S. Treasury Money Fund seeks to provide safety, liquidity and
stability of capital and, consistent therewith, to provide current
income. The Fund seeks to maintain a constant net asset value of $1.00
per share, although in certain circumstances this may not be possible,
and declares dividends daily.
Scudder Cash Investment Trust ("SCIT") seeks to maintain the stability
of capital and, consistent therewith, to maintain the liquidity of
capital and to provide current income. SCIT seeks to maintain a
constant net asset value of $1.00 per share, although in certain
circumstances this may not be possible, and declares dividends daily.
20
<PAGE>
Scudder Money Market Series+ seeks to provide investors with as high a
level of current income as is consistent with its investment polices
and with preservation of capital and liquidity. The Fund seeks to
maintain a constant net asset value of $1.00 per share, but there is no
assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
Scudder Government Money Market Series+ seeks to provide investors with
as high a level of current income as is consistent with its investment
polices and with preservation of capital and liquidity. The Fund seeks
to maintain a constant net asset value of $1.00 per share, but there is
no assurance that it will be able to do so. The institutional class of
shares of this Fund is not within the Scudder Family of Funds.
TAX FREE MONEY MARKET
Scudder Tax Free Money Fund ("STFMF") seeks to provide income exempt
from regular federal income tax and stability of principal through
investments primarily in municipal securities. STFMF seeks to maintain
a constant net asset value of $1.00 per share, although in extreme
circumstances this may not be possible.
Scudder Tax Free Money Market Series+ seeks to provide investors with
as high a level of current income that cannot be subjected to federal
income tax by reason of federal law as is consistent with its
investment policies and with preservation of capital and liquidity. The
Fund seeks to maintain a constant net asset value of $1.00 per share,
but there is no assurance that it will be able to do so. The
institutional class of shares of this Fund is not within the Scudder
Family of Funds.
Scudder California Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share while
providing California taxpayers income exempt from both California State
personal and regular federal income taxes. The Fund is a professionally
managed portfolio of high quality, short-term California municipal
securities. There can be no assurance that the stable net asset value
will be maintained.
Scudder New York Tax Free Money Fund* seeks stability of capital and
the maintenance of a constant net asset value of $1.00 per share, while
providing New York taxpayers income exempt from New York State and New
York City personal income taxes and regular federal income tax. There
can be no assurance that the stable net asset value will be maintained.
TAX FREE
Scudder Limited Term Tax Free Fund seeks to provide as high a level of
income exempt from regular federal income tax as is consistent with a
high degree of principal stability.
Scudder Medium Term Tax Free Fund seeks to provide a high level of
income free from regular federal income taxes and to limit principal
fluctuation. The Fund will invest primarily in high-grade,
intermediate-term bonds.
Scudder Managed Municipal Bonds seeks to provide income exempt from
regular federal income tax primarily through investments in high-grade,
long-term municipal securities.
Scudder High Yield Tax Free Fund seeks to provide a high level of
interest income, exempt from regular federal income tax, from an
actively managed portfolio consisting primarily of investment-grade
municipal securities.
Scudder California Tax Free Fund* seeks to provide California taxpayers
with income exempt from both California State personal income and
regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of California municipal securities.
- -----------------------------
+ The institutional class of shares is not part of the Scudder Family of
Funds.
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
21
<PAGE>
Scudder Massachusetts Limited Term Tax Free Fund* seeks to provide
Massachusetts taxpayers with as high a level of income exempt from
Massachusetts personal income tax and regular federal income tax, as is
consistent with a high degree of price stability, through a
professionally managed portfolio consisting primarily of
investment-grade municipal securities.
Scudder Massachusetts Tax Free Fund* seeks to provide Massachusetts
taxpayers with income exempt from both Massachusetts personal income
tax and regular federal income tax. The Fund is a professionally
managed portfolio consisting primarily of investment-grade municipal
securities.
Scudder New York Tax Free Fund* seeks to provide New York taxpayers
with income exempt from New York State and New York City personal
income taxes and regular federal income tax. The Fund is a
professionally managed portfolio consisting primarily of New York
municipal securities.
Scudder Ohio Tax Free Fund* seeks to provide Ohio taxpayers with income
exempt from both Ohio personal income tax and regular federal income
tax. The Fund is a professionally managed portfolio consisting
primarily of investment-grade municipal securities.
Scudder Pennsylvania Tax Free Fund* seeks to provide Pennsylvania
taxpayers with income exempt from both Pennsylvania personal income tax
and regular federal income tax. The Fund is a professionally managed
portfolio consisting primarily of investment-grade municipal
securities.
U.S. INCOME
Scudder Short Term Bond Fund seeks to provide high income while
managing its portfolio in a way that is consistent with maintaining a
high degree of stability of shareholders' capital. It does this by
investing mainly in bonds with short remaining maturities.
Scudder GNMA Fund seeks to provide high income. It does this by
investing mainly in "Ginnie Maes": mortgage-backed securities that are
issued or guaranteed by the Government National Mortgage
Association (GNMA).
Scudder Income Fund seeks to provide high income while managing its
portfolio in a way that is consistent with the prudent investment of
shareholders' capital. It does this by using a flexible investment
program that emphasizes high-grade bonds.
Scudder Corporate Bond Fund seeks to provide high income. It does this
by investing mainly in corporate bonds.
Scudder High Yield Bond Fund seeks to provide high income and,
secondarily, capital appreciation. It does this by investing mainly in
lower rated, higher yielding corporate bonds, often called junk bonds.
GLOBAL INCOME
Scudder Global Bond Fund seeks to provide total return with an emphasis
on current income by investing primarily in high-grade bonds
denominated in foreign currencies and the U.S. dollar. As a secondary
objective, the Fund will seek capital appreciation.
Scudder International Bond Fund seeks to provide income primarily by
investing in a managed portfolio of high-grade international bonds. As
a secondary objective, the Fund seeks protection and possible
enhancement of principal value by actively managing currency, bond
market and maturity exposure and by security selection.
- -----------------------------
* These funds are not available for sale in all states. For information,
contact Scudder Investor Services, Inc.
22
<PAGE>
Scudder Emerging Markets Income Fund seeks to provide high current
income and, secondarily, long-term capital appreciation through
investments primarily in high-yielding debt securities issued by
governments and corporations in emerging markets.
ASSET ALLOCATION
Scudder Pathway Series: Conservative Portfolio seeks primarily current
income and secondarily long-term growth of capital. In pursuing these
objectives, the Portfolio, under normal market conditions, will invest
substantially in a select mix of Scudder bond mutual funds, but will
have some exposure to Scudder equity mutual funds.
Scudder Pathway Series: Balanced Portfolio seeks to provide investors
with a balance of growth and income by investing in a select mix of
Scudder money market, bond and equity mutual funds.
Scudder Pathway Series: Growth Portfolio seeks to provide investors
with long-term growth of capital. In pursuing this objective, the
Portfolio will, under normal market conditions, invest predominantly in
a select mix of Scudder equity mutual funds designed to provide
long-term growth.
Scudder Pathway Series: International Portfolio seeks maximum total
return for investors. Total return consists of any capital appreciation
plus dividend income and interest. To achieve this objective, the
Portfolio invests in a select mix of established international and
global Scudder funds.
U.S. GROWTH AND INCOME
Scudder Balanced Fund seeks a balance of growth and income from a
diversified portfolio of equity and fixed-income securities. The Fund
also seeks long-term preservation of capital through a quality-oriented
investment approach that is designed to reduce risk.
Scudder Dividend & Growth Fund seeks high current income and long-term
growth of capital through investment in income paying equity
securities.
Scudder Growth and Income Fund seeks long-term growth of capital,
current income, and growth of income.
Scudder Select 500 Fund seeks to provide long-term growth and income
through investment in selected stocks of companies in the S&P 500
Index.
Scudder 500 Index Fund seeks to provide investment results that, before
expenses, correspond to the total return of common stocks publicly
traded in the United States, as represented by the Standard & Poor's
500 Composite Stock Price Index.
Scudder Real Estate Investment Fund seeks long-term capital growth and
current income by investing primarily in equity securities of companies
in the real estate industry.
U.S. GROWTH
Value
Scudder Large Company Value Fund seeks to maximize long-term capital
appreciation through a value-driven investment program.
Scudder Value Fund** seeks long-term growth of capital through
investment in undervalued equity securities.
Scudder Small Company Value Fund invests for long-term growth of
capital by seeking out undervalued stocks of small U.S. companies.
- -----------------------------
** Only the Scudder Shares are part of the Scudder Family of Funds.
23
<PAGE>
Scudder Micro Cap Fund seeks long-term growth of capital by investing
primarily in a diversified portfolio of U.S. micro-capitalization
("micro-cap") common stocks.
Growth
Scudder Classic Growth Fund** seeks to provide long-term growth of
capital with reduced share price volatility compared to other growth
mutual funds.
Scudder Large Company Growth Fund seeks to provide long-term growth of
capital through investment primarily in the equity securities of
seasoned, financially strong U.S. growth companies.
Scudder Select 1000 Growth Fund seeks to provide long-term growth of
capital through investment in selected stocks of companies in the
Russell 1000 Growth Index.
Scudder Development Fund seeks long-term growth of capital by investing
primarily in medium-size companies with the potential for sustainable
above-average earnings growth.
Scudder 21st Century Growth Fund seeks long-term growth of capital by
investing primarily in the securities of emerging growth companies
poised to be leaders in the 21st century.
GLOBAL EQUITY
Worldwide
Scudder Global Fund seeks long-term growth of capital through a
diversified portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt
securities convertible into common stocks.
Scudder International Value Fund seeks long-term capital appreciation
through investment primarily in undervalued foreign equity securities.
Scudder International Growth and Income Fund seeks long-term growth of
capital and current income primarily from foreign equity securities.
Scudder International Fund*** seeks long-term growth of capital
primarily through a diversified portfolio of marketable foreign equity
securities.
Scudder International Growth Fund seeks long-term capital appreciation
through investment primarily in the equity securities of foreign
companies with high growth potential.
Scudder Global Discovery Fund** seeks above-average capital
appreciation over the long term by investing primarily in the equity
securities of small companies located throughout the world.
Scudder Emerging Markets Growth Fund seeks long-term growth of capital
primarily through equity investment in emerging markets around the
globe.
Scudder Gold Fund seeks maximum return (principal change and income)
consistent with investing in a portfolio of gold-related equity
securities and gold.
Regional
Scudder Greater Europe Growth Fund seeks long-term growth of capital
through investments primarily in the equity securities of European
companies.
- -----------------------------
*** Only the International Shares are part of the Scudder Family of Funds.
** Only the Scudder Shares are part of the Scudder Family of Funds.
24
<PAGE>
Scudder Pacific Opportunities Fund seeks long-term growth of capital
through investment primarily in the equity securities of Pacific Basin
companies, excluding Japan.
Scudder Latin America Fund seeks to provide long-term capital
appreciation through investment primarily in the securities of Latin
American issuers.
The Japan Fund, Inc. seeks long-term capital appreciation by investing
primarily in equity securities (including American Depository Receipts)
of Japanese companies.
INDUSTRY SECTOR FUNDS
Choice Series
Scudder Financial Services Fund seeks long-term growth of capital
primarily through investment in equity securities of financial services
companies.
Scudder Health Care Fund seeks long-term growth of capital primarily
through investment in securities of companies that are engaged in the
development, production or distribution of products or services related
to the treatment or prevention of diseases and other medical problems.
Scudder Technology Fund seeks long-term growth of capital primarily
through investment in securities of companies engaged in the
development, production or distribution of technology-related products
or services.
SCUDDER PREFERRED SERIES
Scudder Tax Managed Growth Fund seeks long-term growth of capital on an
after-tax basis by investing primarily in established, medium- to
large-sized U.S. companies with leading competitive positions.
Scudder Tax Managed Small Company Fund seeks long-term growth of
capital on an after-tax basis through investment primarily in
undervalued stocks of small U.S. companies.
The net asset values of most Scudder funds can be found daily in the
"Mutual Funds" section of The Wall Street Journal under "Scudder Funds," and in
other leading newspapers throughout the country. Investors will notice the net
asset value and offering price are the same, reflecting the fact that no sales
commission or "load" is charged on the sale of shares of the Scudder funds. The
latest seven-day yields for the money-market funds can be found every Monday and
Thursday in the "Money-Market Funds" section of The Wall Street Journal. This
information also may be obtained by calling the Scudder Automated Information
Line (SAIL) at 1-800-343-2890.
The Scudder Family of Funds offers many conveniences and services,
including: active professional investment management; broad and diversified
investment portfolios; pure no-load funds with no commissions to purchase or
redeem shares or Rule 12b-1 distribution fees; individual attention from a
service representative of Scudder Investor.
SPECIAL PLAN ACCOUNTS
Detailed information on any Scudder investment plan, including the
applicable charges, minimum investment requirements and disclosures made
pursuant to Internal Revenue Service (the "IRS") requirements, may be obtained
by contacting Scudder Investor Services, Inc., Two International Place, Boston,
Massachusetts 02110-4103 or by calling toll free, 1-800-225-2470. The
discussions of the plans below describe only certain aspects of the federal
income tax treatment of the plan. The state tax treatment may be different and
may vary from state to state. It is advisable for an investor considering the
funding of the investment plans described below to consult with an attorney or
other investment or tax adviser with respect to the suitability requirements and
tax aspects thereof.
Shares of the Fund may also be a permitted investment under profit
sharing and pension plans and IRAs other than those offered by the Fund's
distributor depending on the provisions of the relevant plan or IRA.
None of the plans assures a profit or guarantees protection against
depreciation, especially in declining markets.
25
<PAGE>
Scudder Retirement Plans: Profit-Sharing and Money Purchase
Pension Plans for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder Profit-Sharing Plan (including a version of the
Plan which includes a cash-or-deferred feature) or a Scudder Money Purchase
Pension Plan (jointly referred to as the Scudder Retirement Plans) adopted by a
corporation, a self-employed individual or a group of self-employed individuals
(including sole proprietorships and partnerships), or other qualifying
organization. Each of these forms was approved by the IRS as a prototype. The
IRS's approval of an employer's plan under Section 401(a) of the Internal
Revenue Code will be greatly facilitated if it is in such approved form. Under
certain circumstances, the IRS will assume that a plan, adopted in this form,
after special notice to any employees, meets the requirements of Section 401(a)
of the Internal Revenue Code as to form.
Scudder 401(k): Cash or Deferred Profit-Sharing Plan
for Corporations and Self-Employed Individuals
Shares of the Fund may be purchased as the investment medium under a
plan in the form of a Scudder 401(k) Plan adopted by a corporation, a
self-employed individual or a group of self-employed individuals (including sole
proprietors and partnerships), or other qualifying organization. This plan has
been approved as a prototype by the IRS.
Scudder IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for an
Individual Retirement Account which meets the requirements of Section 408(a) of
the Internal Revenue Code.
A single individual who is not an active participant in an
employer-maintained retirement plan, a simplified employee pension plan, or a
tax-deferred annuity program (a "qualified plan"), and a married individual who
is not an active participant in a qualified plan and whose spouse is also not an
active participant in a qualified plan, are eligible to make tax deductible
contributions of up to $2,000 to an IRA prior to the year such individual
attains age 70 1/2. In addition, certain individuals who are active participants
in qualified plans (or who have spouses who are active participants) are also
eligible to make tax-deductible contributions to an IRA; the annual amount, if
any, of the contribution which such an individual will be eligible to deduct
will be determined by the amount of his, her, or their adjusted gross income for
the year. Whenever the adjusted gross income limitation prohibits an individual
from contributing what would otherwise be the maximum tax-deductible
contribution he or she could make, the individual will be eligible to contribute
the difference to an IRA in the form of nondeductible contributions.
An eligible individual may contribute as much as $2,000 of qualified
income (earned income or, under certain circumstances, alimony) to an IRA each
year (up to $2,000 per individual for married couples, even if only one spouse
has earned income). All income and capital gains derived from IRA investments
are reinvested and compound tax-deferred until distributed. Such tax-deferred
compounding can lead to substantial retirement savings.
The table below shows how much individuals would accumulate in a fully
tax-deductible IRA by age 65 (before any distributions) if they contribute
$2,000 at the beginning of each year, assuming average annual returns of 5, 10,
and 15%. (At withdrawal, accumulations in this table will be taxable.)
Value of IRA at Age 65
Assuming $2,000 Deductible Annual Contribution
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 $253,680 $973,704 $4,091,908
35 139,522 361,887 999,914
45 69,439 126,005 235,620
55 26,414 35,062 46,699
</TABLE>
26
<PAGE>
This next table shows how much individuals would accumulate in non-IRA
accounts by age 65 if they start with $2,000 in pretax earned income at the
beginning of each year (which is $1,380 after taxes are paid), assuming average
annual returns of 5, 10 and 15%. (At withdrawal, a portion of the accumulation
in this table will be taxable.)
Value of a Non-IRA Account at
Age 65 Assuming $1,380 Annual Contributions
(post tax, $2,000 pretax) and a 31% Tax Bracket
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Starting Annual Rate of Return
Age of ------------------------------------------------------------------------------
Contributions 5% 10% 15%
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
25 $119,318 $287,021 $741,431
35 73,094 136,868 267,697
45 40,166 59,821 90,764
55 16,709 20,286 24,681
</TABLE>
Scudder Roth IRA: Individual Retirement Account
Shares of the Fund may be purchased as the underlying investment for a
Roth Individual Retirement Account which meets the requirements of Section 408A
of the Internal Revenue Code.
A single individual earning below $95,000 can contribute up to $2,000
per year to a Roth IRA. The maximum contribution amount diminishes and gradually
falls to zero for single filers with adjusted gross incomes ranging from $95,000
to $110,000. Married couples earning less than $150,000 combined, and filing
jointly, can contribute a full $4,000 per year ($2,000 per IRA). The maximum
contribution amount for married couples filing jointly phases out from $150,000
to $160,000.
An eligible individual can contribute money to a traditional IRA and a
Roth IRA as long as the total contribution to all IRAs does not exceed $2,000.
No tax deduction is allowed under Section 219 of the Internal Revenue Code for
contributions to a Roth IRA. Contributions to a Roth IRA may be made even after
the individual for whom the account is maintained has attained age 70 1/2.
All income and capital gains derived from Roth IRA investments are
reinvested and compounded tax-free. Such tax-free compounding can lead to
substantial retirement savings. No distributions are required to be taken prior
to the death of the original account holder. If a Roth IRA has been established
for a minimum of five years, distributions can be taken tax-free after reaching
age 59 1/2, for a first-time home purchase ($10,000 maximum, one-time use) or
upon death or disability. All other distributions of earnings from a Roth IRA
are taxable and subject to a 10% tax penalty unless an exception applies.
Exceptions to the 10% penalty include: disability, certain medical expenses, the
purchase of health insurance for an unemployed individual and qualified higher
education expenses.
An individual with an income of $100,000 or less (who is not married
filing separately) can roll his or her existing IRA into a Roth IRA. However,
the individual must pay taxes on the taxable amount in his or her traditional
IRA. Individuals who complete the rollover in 1998 will be allowed to spread the
tax payments over a four-year period. After 1998, all taxes on such a rollover
will have to be paid in the tax year in which the rollover is made.
Scudder 403(b) Plan
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered annuity plans under the provisions of Section 403(b)(7) of the
Internal Revenue Code. In general, employees of tax-exempt organizations
described in Section 501(c)(3) of the Internal Revenue Code (such as hospitals,
churches, religious, scientific, or literary organizations and educational
institutions) or a public school system are eligible to participate in a 403(b)
plan.
Automatic Withdrawal Plan
Non-retirement plan shareholders may establish an Automatic Withdrawal
Plan to receive monthly, quarterly or periodic redemptions from his or her
account for any designated amount of $50 or more. Shareholders may designate
27
<PAGE>
which day they want the automatic withdrawal to be processed. The check amounts
may be based on the redemption of a fixed dollar amount, fixed share amount,
percent of account value or declining balance. The Plan provides for income
dividends and capital gains distributions, if any, to be reinvested in
additional shares. Shares are then liquidated as necessary to provide for
withdrawal payments. Since the withdrawals are in amounts selected by the
investor and have no relationship to yield or income, payments received cannot
be considered as yield or income on the investment and the resulting
liquidations may deplete or possibly extinguish the initial investment and any
reinvested dividends and capital gains distributions. Requests for increases in
withdrawal amounts or to change the payee must be submitted in writing, signed
exactly as the account is registered, and contain signature guarantee(s) as
described under "Transaction information -- Redeeming shares -- Signature
guarantees" in the Fund's prospectus. Any such requests must be received by the
Fund's transfer agent ten days prior to the date of the first automatic
withdrawal. An Automatic Withdrawal Plan may be terminated at any time by the
shareholder, the [Trust, Corporation] or its agent on written notice, and will
be terminated when all shares of the Fund under the Plan have been liquidated or
upon receipt by the [Trust, Corporation] of notice of death of the shareholder.
An Automatic Withdrawal Plan request form can be obtained by calling
1-800-225-5163.
Group or Salary Deduction Plan
An investor may join a Group or Salary Deduction Plan where
satisfactory arrangements have been made with Scudder Investor Services, Inc.
for forwarding regular investments through a single source. The minimum annual
investment is $240 per investor which may be made in monthly, quarterly,
semiannual or annual payments. The minimum monthly deposit per investor is $20.
Except for trustees or custodian fees for certain retirement plans, at present
there is no separate charge for maintaining group or salary deduction plans;
however, the [Trust, Corporation] and its agents reserve the right to establish
a maintenance charge in the future depending on the services required by the
investor.
The Trust reserves the right, after notice has been given to the
shareholder, to redeem and close a shareholder's account in the event that the
shareholder ceases participating in the group plan prior to investment of $1,000
per individual or in the event of a redemption which occurs prior to the
accumulation of that amount or which reduces the account value to less than
$1,000 and the account value is not increased to $1,000 within a reasonable time
after notification. An investor in a plan who has not purchased shares for six
months shall be presumed to have stopped making payments under the plan.
Automatic Investment Plan
Shareholders may arrange to make periodic investments through automatic
deductions from checking accounts by completing the appropriate form and
providing the necessary documentation to establish this service. The minimum
investment is $50.
The Automatic Investment Plan involves an investment strategy called
dollar cost averaging. Dollar cost averaging is a method of investing whereby a
specific dollar amount is invested at regular intervals. By investing the same
dollar amount each period, when shares are priced low the investor will purchase
more shares than when the share price is higher. Over a period of time this
investment approach may allow the investor to reduce the average price of the
shares purchased. However, this investment approach does not assure a profit or
protect against loss. This type of regular investment program may be suitable
for various investment goals such as, but not limited to, college planning or
saving for a home.
Uniform Transfers/Gifts to Minors Act
Grandparents, parents or other donors may set up custodian accounts for
minors. The minimum initial investment is $1,000 unless the donor agrees to
continue to make regular share purchases for the account through Scudder's
Automatic Investment Plan (AIP). In this case, the minimum initial investment is
$500.
The Trust reserves the right, after notice has been given to the
shareholder and custodian, to redeem and close a shareholder's account in the
event that regular investments to the account cease before the $1,000 minimum is
reached.
28
<PAGE>
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
(See "Understanding Distributions and Taxes" in a Fund's prospectus.)
The Fund intends to follow the practice of distributing substantially
all of its investment company taxable income, which includes any excess of net
realized short-term capital gains over net realized long-term capital losses.
The Fund may follow the practice of distributing the entire excess of net
realized long-term capital gains over net realized short-term capital losses.
However, the Fund may retain all or part of such gain for reinvestment after
paying the related federal income taxes for which the shareholders may then be
able to claim a credit against their federal income tax liability. (See
"TAXES.")
If the Fund does not distribute the amount of capital gain and/or
ordinary income required to be distributed by an excise tax provision of the
Code, the Fund may be subject to that excise tax. In certain circumstances, the
Fund may determine that it is in the interest of shareholders to distribute less
than the required amount. (See "TAXES.")
Dividends will be declared daily and distributions of net investment
income will be made monthly. Distributions of net short-term and net long-term
realized capital gains will be made in November or December to prevent
application of a federal excise tax, although an additional distribution may be
made if necessary. Both types of distributions will be made in shares of the
Fund and confirmations will be mailed to each shareholder unless a shareholder
has elected to receive cash, in which case a check will be sent.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. The characterization of distributions on such
correspondence may differ from the characterization for federal tax purposes. In
January of each year, the Fund issues to each shareholder a statement of the
federal income tax status of all distributions in the prior calendar year.
PERFORMANCE INFORMATION
(See "Financial Highlights" in the Fund's prospectus.)
From time to time, quotations of the Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:
Average Annual Total Return
Average annual total return is the average annual compound rate of
return for the periods of one year, five years and for the life of the Fund
ended on the last day of a recent calendar quarter. Average annual total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compound rates of return of a hypothetical investment over
such periods, according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)^1/n - 1
Where:
P = a hypothetical initial investment of $1,000
T = Average Annual Total Return
n = number of years
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period
Average Annual Total Return for Periods ended January 31, 1999
One Five Ten
Year Years Years
29
<PAGE>
Scudder GNMA Fund 6.43% 6.21% 8.15%
On August 10, 1998, the Board of Trustees of the Fund changed the fiscal year
end from March 31 to January 31.
Cumulative Total Return
Cumulative total return is the cumulative rate of return on a
hypothetical initial investment of $1,000 for a specified period. Cumulative
total return quotations reflect changes in the price of a Fund's shares and
assume that all dividends and capital gains distributions during the period were
reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):
C = (ERV/P) - 1
Where:
C = Cumulative Total Return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value,
at the end of the applicable period, of a
hypothetical $1,000 investment made at the
beginning of the applicable period
Cumulative Total Return for Periods Ended January 31, 1999
One Year Five Years Ten Years
Scudder GNMA Fund 6.43% 35.14% 118.89%
On August 10, 1998, the Board of Trustees of the Fund changed the fiscal year
end from March 31 to January 31.
Total Return
Total return is the rate of return on an investment for a specified
period of time calculated in the same manner as cumulative total return.
Yield
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield, sometimes
referred to as the Fund's "SEC yield," is calculated by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
YIELD = 2[(a-b/cd + 1)^6 - 1]
Where:
a = dividends and interest earned during the
period
b = expenses accrued for the period (net of
reimbursements)
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the
last day of the period
The 30-day SEC yield for Scudder GNMA Fund for the Period ended March
31, 1999 was 5.09%.
Quotations of the Fund's performance are historical, show the
performance of a hypothetical investment and are not intended to indicate future
performance of the Fund. Average annual total return, cumulative total return
and yield
30
<PAGE>
for the Fund will vary based on changes in market conditions and the level of
the Fund's expenses. An investor's shares when redeemed may be worth more or
less than their original cost.
Investors should be aware that the principal of the Fund is not
insured.
Comparison of Fund Performance
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effects of the methods used to calculate performance when comparing
performance of the Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or
prospective shareholders, the Fund also may compare these figures to the
performance of unmanaged indices which may assume reinvestment of dividends or
interest but generally do not reflect deductions for administrative and
management costs. Examples include, but are not limited to the Dow Jones
Industrial Average, the Consumer Price Index, Standard & Poor's 500 Composite
Stock Price Index (S&P 500), the Nasdaq OTC Composite Index, the Nasdaq
Industrials Index, the Russell 2000 Index, the Wilshire Real Estate Securities
Index and statistics published by the Small Business Administration.
From time to time, in advertising and marketing literature, this Fund's
performance may be compared to the performance of broad groups of mutual funds
with similar investment goals, as tracked by independent organizations such as,
Investment Company Data, Inc. ("ICD"), Lipper Analytical Services, Inc.
("Lipper"), CDA Investment Technologies, Inc. ("CDA"), Morningstar, Inc., Value
Line Mutual Fund Survey and other independent organizations. When these
organizations' tracking results are used, the Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the appropriate volatility grouping, where volatility is a measure of a
fund's risk. For instance, a Scudder growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund category; and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent organizations.
From time to time, in marketing and other Fund literature, Trustees and
officers of the Fund, the Fund's portfolio manager, or members of the portfolio
management team may be depicted and quoted to give prospective and current
shareholders a better sense of the outlook and approach of those who manage the
Fund. In addition, the amount of assets that the Adviser has under management in
various geographical areas may be quoted in advertising and marketing materials.
The Fund may be advertised as an investment choice in Scudder's college
planning program. The description may contain illustrations of projected future
college costs based on assumed rates of inflation and examples of hypothetical
fund performance, calculated as described above.
Statistical and other information, as provided by the Social Security
Administration, may be used in marketing materials pertaining to retirement
planning in order to estimate future payouts of social security benefits.
Estimates may be used on demographic and economic data.
Marketing and other Fund literature may include a description of the
potential risks and rewards associated with an investment in the Fund. The
description may include a "risk/return spectrum" which compares the Fund to
other Scudder funds or broad categories of funds, such as money market, bond or
equity funds, in terms of potential risks and returns. Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating yield.
Share price, yield and total return of a bond fund will fluctuate. The share
price and return of an equity fund also will fluctuate. The description may also
compare the Fund to bank products, such as certificates of deposit. Unlike
mutual funds, certificates of deposit are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.
Because bank products guarantee the principal value of an investment
and money market funds seek stability of principal, these investments are
considered to be less risky than investments in either bond or equity funds,
which may involve the loss of principal. However, all long-term investments,
including investments in bank products, may be subject to inflation risk, which
is the risk of erosion of the value of an investment as prices increase over a
long time
31
<PAGE>
period. The risks/returns associated with an investment in bond or equity funds
depend upon many factors. For bond funds these factors include, but are not
limited to, a fund's overall investment objective, the average portfolio
maturity, credit quality of the securities held, and interest rate movements.
For equity funds, factors include a fund's overall investment objective, the
types of equity securities held and the financial position of the issuers of the
securities. The risks/returns associated with an investment in international
bond or equity funds also will depend upon currency exchange rate fluctuation.
A risk/return spectrum generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds. Shorter-term bond funds generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase higher quality securities relative to bond funds that purchase
lower quality securities. Growth and income equity funds are generally
considered to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.
Risk/return spectrums also may depict funds that invest in both
domestic and foreign securities or a combination of bond and equity securities.
Evaluation of Fund performance or other relevant statistical
information made by independent sources may also be used in advertisements
concerning the Fund, including reprints of, or selections from, editorials or
articles about this Fund. Sources for Fund performance information and articles
about the Fund include the following:
American Association of Individual Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Banxquote, an on-line source of national averages for leading money market and
bank CD interest rates, published on a weekly basis by Masterfund, Inc. of
Wilmington, Delaware.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing abroad.
CDA Investment Technologies, Inc., an organization which provides performance
and ranking information through examining the dollar results of hypothetical
mutual fund investments and comparing these results against appropriate market
indices.
Consumer Digest, a monthly business/financial magazine that includes a "Money
Watch" section featuring financial news.
Financial Times, Europe's business newspaper, which features from time to time
articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.
The Frank Russell Company, a West-Coast investment management firm that
periodically evaluates international stock markets and compares foreign equity
market performance to U.S. stock market performance.
32
<PAGE>
Global Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
IBC Money Fund Report, a weekly publication of IBC Financial Data, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity and including certain averages as performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government
Money Fund Average."
Ibbotson Associates, Inc., a company specializing in investment research and
data.
Investment Company Data, Inc., an independent organization which provides
performance ranking information for broad classes of mutual funds.
Investor's Business Daily, a daily newspaper that features financial, economic,
and business news.
Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific funds
and the mutual fund industry as a whole.
Morgan Stanley International, an integrated investment banking firm that
compiles statistical information.
Mutual Fund Values, a biweekly Morningstar, Inc. publication that provides
ratings of mutual funds based on fund performance, risk and portfolio
characteristics.
The New York Times, a nationally distributed newspaper which regularly covers
financial news.
The No-Load Fund Investor, a monthly newsletter, published by Sheldon Jacobs,
that includes mutual fund performance data and recommendations for the mutual
fund investor.
No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund performance, rates funds and discusses investment
strategies for the mutual fund investor.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes a
"Mutual Funds Outlook" section reporting on mutual fund performance measures,
yields, indices and portfolio holdings.
Smart Money, a national personal finance magazine published monthly by Dow Jones
and Company, Inc. and The Hearst Corporation. Focus is placed on ideas for
investing, spending and saving.
Success, a monthly magazine targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.
United Mutual Fund Selector, a semi-monthly investment newsletter, published by
Babson United Investment Advisors, that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.
USA Today, a leading national daily newspaper.
U.S. News and World Report, a national news weekly that periodically reports
mutual fund performance data.
33
<PAGE>
Value Line Mutual Fund Survey, an independent organization that provides
biweekly performance and other information on mutual funds.
The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.
Wiesenberger Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds, management policies, salient features, management results,
income and dividend records and price ranges.
Working Woman, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
Worth, a national publication issued 10 times per year by Capital Publishing
Company, a subsidiary of Fidelity Investments. Focus is placed on personal
financial journalism.
FUND ORGANIZATION
(See "Who Manages the Funds" in a Fund's prospectus.)
The Fund is a Massachusetts business trust established under the name
Master Investment Services Tax Free Fund pursuant to a Declaration of Trust
dated March 24, 1983. The Declaration of Trust was amended on April 5, 1985 to
change the name of the Fund to Scudder Government Mortgage Securities Fund. The
Declaration of Trust was further amended on November 3, 1987 to change the name
of the Fund to Scudder GNMA Fund. The Fund had not commenced operations prior to
1985. On November 4, 1987, the par value of the shares of beneficial interest of
the Fund was changed from no par value to $.01 par value per share. The Fund's
authorized capital consists of an unlimited number of shares of beneficial
interest of $.01 par value, all of which are of one class and have equal rights
as to voting, dividends and liquidation. Shareholders have one vote for each
share held.
All shares issued and outstanding will be fully paid and nonassessable
by the Fund, and redeemable as described in this Statement of Additional
Information and in the Fund's prospectus. The Trustees have the authority to
issue two or more series of shares and to designate the relative rights and
preferences as between the different series, although they have not exercised
this authority. If more than one series of shares were issued and a series were
unable to meet its obligations, the remaining series might have to assume the
unsatisfied obligations of that series.
The Trustees, at their discretion, may authorize the division of shares
of the Fund (or shares of a series) into different classes, permitting shares of
different classes to be distributed by different methods. Although shareholders
of different classes of a series would have an interest in the same portfolio of
assets, shareholders of different classes may bear different expenses in
connection with different methods of distribution.
The Declaration of Trust provides that obligations of the Fund are not
binding upon the Trustees individually but only upon the property of the Fund,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Fund will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Fund except if
it is determined in the manner provided in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Fund. However, nothing in the Declaration of Trust
protects or indemnifies a Trustee or officer against any liability to which he
or she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his or her respective office.
INVESTMENT ADVISER
(See "Who Manages the Funds" in the Fund's prospectus.)
Scudder Kemper Investments, Inc. (the "Adviser"), an investment counsel
firm, acts as investment adviser to the Fund. This organization, the predecessor
of which is Scudder, Stevens & Clark, Inc., is one of the most experienced
investment counsel firms in the U. S. It was established as a partnership in
1919 and pioneered the practice of providing
34
<PAGE>
investment counsel to individual clients on a fee basis. In 1928 it introduced
the first no-load mutual fund to the public. In 1953 the Adviser introduced
Scudder International Fund, Inc., the first mutual fund available in the U.S.
investing internationally in securities of issuers in several foreign countries.
The predecessor firm reorganized from a partnership to a corporation on June 28,
1985. On June 26, 1997, Scudder, Stevens & Clark, Inc. ("Scudder") entered into
an agreement with Zurich Insurance Company ("Zurich") pursuant to which Scudder
and Zurich agreed to form an alliance. On December 31, 1997, Zurich acquired a
majority interest in Scudder, and Zurich Kemper Investments, Inc., a Zurich
subsidiary, became part of Scudder. Scudder's name has been changed to Scudder
Kemper Investments, Inc.
Founded in 1872, Zurich is a multinational, public corporation
organized under the laws of Switzerland. Its home office is located at
Mythenquai 2, 8002 Zurich, Switzerland. Historically, Zurich's earnings have
resulted from its operations as an insurer as well as from its ownership of its
subsidiaries and affiliated companies (the "Zurich Insurance Group"). Zurich and
the Zurich Insurance Group provide an extensive range of insurance products and
services and have branch offices and subsidiaries in more than 40 countries
throughout the world.
The principal source of the Adviser's income is professional fees
received from providing continuous investment advice, and the firm derives no
income from brokerage or underwriting of securities. Today, it provides
investment counsel for many individuals and institutions, including insurance
companies, colleges, industrial corporations, and financial and banking
organizations. In addition, it manages Montgomery Street Income Securities,
Inc., Scudder California Tax Free Trust, Scudder Cash Investment Trust, Value
Equity Trust, Scudder Fund, Inc., Scudder Funds Trust, Global/International
Fund, Inc., Scudder Global High Income Fund, Inc., Scudder GNMA Fund, Scudder
Portfolio Trust, Scudder International Fund, Inc., Investment Trust, Scudder
Municipal Trust, Scudder Mutual Funds, Inc., Scudder New Asia Fund, Inc.,
Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities Trust,
Scudder State Tax Free Trust, Scudder Tax Free Money Fund, Scudder Tax Free
Trust, Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
The Argentina Fund, Inc., The Brazil Fund, Inc., The Korea Fund, Inc. and The
Japan Fund, Inc. Some of the foregoing companies or trusts have two or more
series.
The Adviser also provides investment advisory services to the mutual
funds which comprise the AARP Investment Program from Scudder. The AARP
Investment Program from Scudder has assets over $13 billion and includes the
AARP Growth Trust, AARP Income Trust, AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
Pursuant to an Agreement between the Adviser and AMA Solutions, Inc., a
subsidiary of the American Medical Association (the "AMA"), dated May 9, 1997,
the Adviser has agreed, subject to applicable state regulations, to pay AMA
Solutions, Inc. royalties in an amount equal to 5% of the management fee
received by the Adviser with respect to assets invested by AMA members in
Scudder funds in connection with the AMA InvestmentLink(SM) Program. The Adviser
will also pay AMA Solutions, Inc. a general monthly fee, currently in the amount
of $833. The AMA and AMA Solutions, Inc. are not engaged in the business of
providing investment advice and neither is registered as an investment adviser
or broker/dealer under federal securities laws. Any person who participates in
the AMA InvestmentLink(SM) Program will be a customer of the Adviser (or of a
subsidiary thereof) and not the AMA or AMA Solutions, Inc. AMA
InvestmentLink(SM) is a service mark of AMA Solutions, Inc.
The Adviser maintains a large research department, which conducts
continuous studies of the factors that affect the position of various
industries, companies and individual securities. The Adviser receives published
reports and statistical compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities. Scudder's international investment
management team travels the world, researching hundreds of companies. In
selecting the securities in which the Fund may invest, the conclusions and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.
Certain investments may be appropriate for the Fund and also for other
clients advised by the Adviser. Investment decisions for the Fund and other
clients are made with a view to achieving their respective investment objectives
and after consideration of such factors as their current holdings, availability
of cash for investment and the size of their investments generally. Frequently,
a particular security may be bought or sold for only one client or in different
amounts and at different times for more than one but less than all clients.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In addition, purchases or sales
35
<PAGE>
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases, this procedure
could have an adverse effect on the price or amount of the securities purchased
or sold by the Fund. Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of achieving the most
favorable net results to the Fund.
The transaction between Scudder and Zurich resulted in the assignment
of the Fund's investment management agreement with Scudder, the agreement was
deemed to be automatically terminated at the consummation of the transaction. In
anticipation of the transaction, however, the Trustees approved a new investment
management agreement between the Fund and the Adviser on August 12, 1997. At the
special meeting of the Fund's shareholders held on October 24, 1997, the
shareholders also approved the investment management agreement. The investment
management agreement became effective as of December 31, 1997.
On September 7, 1998, the businesses of Zurich (including Zurich's 70%
interest in Scudder Kemper) and the financial services businesses of B.A.T
Industries p.l.c. ("B.A.T") were combined to form a new global insurance and
financial services company known as Zurich Financial Services Group. By way of a
dual holding company structure, former Zurich shareholders initially owned
approximately 57% of Zurich Financial Services Group, with the balance initially
owned by former B.A.T shareholders.
Upon consummation of this transaction, the Fund's existing investment
management agreement with Scudder Kemper was deemed to have been assigned and,
therefore, terminated. The Board has approved a new investment management
agreement (the "Agreement") with Scudder Kemper, which is substantially
identical to the current investment management agreement, except for the dates
of execution and termination. The Agreement became effective September 7, 1998,
upon the termination of the then current investment management agreement and was
approved at a shareholder meeting held on December 15, 1998.
The Agreement dated September 7, 1998 was approved by the Trustees on
August 10, 1998. The Agreement will continue in effect until September 30, 1999
and from year to year thereafter only if its continuance is approved annually by
the vote of a majority of those Trustees who are not parties to such Agreement
or interested persons of the Adviser or the Trust, cast in person at a meeting
called for the purpose of voting on such approval, and either by a vote of the
Trust's Trustees or of a majority of the outstanding voting securities of the
Fund. The Agreement may be terminated at any time without payment of penalty by
either party on sixty days' written notice and automatically terminate in the
event of its assignment.
Under the Agreement, the Adviser provides the Fund with continuing
investment management consistent with the Fund's investment objectives, policies
and restrictions and determines what securities will be purchased for the
portfolio of the Fund, what portfolio securities will be held or sold by the
Fund, and what portion of the Fund's assets shall be held uninvested, subject
always to the provisions of the Fund's Declaration of Trust and By-Laws, the
1940 Act, the Code and to the Fund's investment objectives, policies and
restrictions, and subject, further, to such policies and restrictions as the
Trustees of the Fund may from time to time establish. The Adviser also advises
and assists the officers of the Fund in taking such steps as are necessary or
appropriate to carry out the decisions of its Trustees and the appropriate
committees of the Trustees regarding the conduct of the business of the Fund.
Under the Agreement, the Adviser renders significant administrative
services (not otherwise provided by third parties) necessary for the Fund's
operations as an open-end investment company including, but not limited to:
preparing reports and notices to the Trustees and shareholders; supervising,
negotiating contractual arrangements with, and monitoring various third-party
service providers to the Fund (such as the Transfer Agent, pricing agents,
Custodian, accountants and others); preparing and making filings with the SEC
and other regulatory agencies; assisting in the preparation and filing of the
Fund's federal, state and local tax returns, preparing and filing the Fund's
federal excise tax returns; assisting with investor and public relations
matters; monitoring the valuation of securities and the calculation of net asset
value; monitoring the registration of shares of the Fund under applicable
federal and state securities laws; maintaining the Fund's books and records to
the extent not otherwise maintained by a third party; assisting in establishing
accounting policies of the Fund; assisting in the resolution of accounting and
legal issues; establishing and monitoring the Fund's operating budget;
processing the payment of the Fund's bills; assisting the Fund in, and otherwise
arranging for, the payment of distributions and dividends and otherwise
assisting the Fund in the conduct of its business, subject to the direction and
control of the Trustees.
36
<PAGE>
The Adviser pays the compensation and expenses (except those of
attending Board and committee meetings outside New York, New York or Boston,
Massachusetts) of all Trustees, officers and executive employees of the Fund
affiliated with the Adviser and makes available, without expense to the Fund,
the services of such Trustees, officers and employees as may duly be elected
officers of the Fund, subject to their individual consent to serve and to any
limitations imposed by law and provides the Fund's office space and facilities.
For these services, the Fund pays the Adviser an annual fee equal to
0.65 of 1% on the first $200 million of the Fund's average daily net assets,
0.60 of 1% on the next $300 million of such assets and 0.55 of 1% on such assets
in excess of $500 million. The fee is payable monthly, provided the Fund will
make such interim payments as may be requested by the Adviser not to exceed 75%
of the amount of the fee then accrued on the books of the Fund and unpaid.
For the fiscal years ended March 31, 1996, 1997, and 1998, the
management fees incurred by the Fund to the Adviser amounted to $2,688,700,
$2,532,357 and $2,433,157, respectively. For the ten months ended January 31,
1999 management fees incurred by the Fund to the Adviser amounted to $2,042,022,
of which $214,238 was unpaid on January 31, 1999.
Under the Agreement, the Fund is responsible for all its other
expenses, including fees and expenses incurred in connection with membership in
investment company organizations; brokers' commissions; legal, auditing and
accounting expenses; the calculation of net asset value; taxes and governmental
fees; the fees and expenses of the Transfer Agent; the cost of preparing share
certificates or any other expenses including expenses of issuance, sale,
underwriting, distribution, redemption or repurchase of shares; the expenses of
and the fees for registering or qualifying securities for sale; the fees and
expenses of the Trustees, officers and employees of the Fund who are not
affiliated with the Adviser; the cost of printing and distributing reports and
notices to shareholders; and the fees and disbursements of custodians. The Fund
may arrange to have third parties assume all or part of the expenses of sale,
underwriting and distribution of shares of the Fund. The Fund is also
responsible for its expenses of shareholders' meetings, the cost of responding
to shareholders' inquiries, and its expenses incurred in connection with
litigation, proceedings and claims and the legal obligation it may have to
indemnify its officers and Trustees with respect thereto.
The Agreement identifies the Adviser as the exclusive licensee of the
rights to use and sublicense the names "Scudder," "Scudder Kemper Investments,
Inc." and "Scudder Stevens and Clark, Inc." (together, the "Scudder Marks").
Under this license the Fund has the non-exclusive right to use and sublicense
the Scudder name and marks as part of its name, and to use the Scudder Marks in
the Fund's investment products and services.
In reviewing the terms of the Agreement and in discussions with the
Adviser concerning such Agreement, the Trustees of the Fund who are not
"interested persons" of the Adviser are represented by independent counsel at
the Fund's expense.
The Agreement provides that the Adviser shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with matters to which the Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Adviser in the performance of its duties or from reckless disregard by the
Adviser of its obligations and duties under the Agreement.
Officers and employees of the Adviser from time to time may have
transactions with various banks, including the Fund's custodian bank. It is the
Adviser's opinion that the terms and conditions of those transactions which have
occurred were not influenced by existing or potential custodial or other Fund
relationships.
The Adviser may serve as adviser to other funds with investment
objectives and policies similar to those of the Fund that may have different
distribution arrangements or expenses, which may affect performance.
None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities, except as individual
subscribers or holders of shares of the Fund.
37
<PAGE>
Personal Investments by Employees of the Adviser
Employees of the Adviser are permitted to make personal securities
transactions, subject to requirements and restrictions set forth in the
Adviser's Code of Ethics. The Code of Ethics contains provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of investment advisory
clients such as the Fund. Among other things, the Code of Ethics, which
generally complies with standards recommended by the Investment Company
Institute's Advisory Group on Personal Investing, prohibits certain types of
transactions absent prior approval, imposes time periods during which personal
transactions may not be made in certain securities, and requires the submission
of duplicate broker confirmations and monthly reporting of securities
transactions. Additional restrictions apply to portfolio managers, traders,
research analysts and others involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with
Underwriter,
Name, Age Scudder Investor
and Address Position with Fund Principal Occupation** Services, Inc.
- ----------- ------------------ ---------------------- --------------
<S> <C> <C> <C>
Daniel Pierce (65)+*= President and Trustee Managing Director of Scudder Vice President and
Kemper Investments, Inc. Assistant Treasurer
Henry P. Becton, Jr. (55) Trustee President and General Manager, --
125 Western Avenue WGBH Educational Foundation
Allston, MA 02134
Dawn-Marie Driscoll (52) Trustee Executive Fellow, Center for --
4909 SW 9th Place Business Ethics, Bentley College;
Cape Coral, FL 33914 President, Driscoll Associates
Peter B. Freeman (66) Trustee Corporate Director and Trustee --
100 Alumni Avenue
Providence, RI 02906
George M. Lovejoy, Jr. (69)= Trustee President and Director, Fifty --
50 Congress Street Associates (real estate
Suite 543 investment trust)
Boston, MA 02109
Wesley W. Marple, Jr. (67)= Trustee Professor of Business --
Northeastern University Administration, Northeastern
413 Hayden Hall University, College of Business
360 Huntington Avenue Administration
Boston, MA 02115
Jean C. Tempel (56) Trustee Venture Partner, Internet Capital --
Internet Capital Group Corp. Group Corp.
Ten Post Office Square
Suite 1325
Boston, MA 02109
Kathryn L. Quirk (46)*=# Trustee, Vice President Managing Director of Scudder Senior Vice
and Assistant Secretary Kemper Investments, Inc. President, Chief
Legal Officer and
Assistant Clerk
38
<PAGE>
Position with
Underwriter,
Name, Age Scudder Investor
and Address Position with Fund Principal Occupation** Services, Inc.
- ----------- ------------------ ---------------------- --------------
Thomas W. Joseph (50)+ Vice President Senior Vice President of Scudder Vice President,
Kemper Investments, Inc. Treasurer and
Assistant Clerk
Ann M. McCreary (42)# Vice President Managing Director of Scudder --
Kemper Investments, Inc.
Richard L. Vandenberg (49)## Vice President Managing Director of Scudder --
Kemper Investments, Inc.
John R. Hebble (40)+ Treasurer Senior Vice President of Scudder Assistant Treasurer
Kemper Investments, Inc.
Caroline Pearson (37)+ Assistant Secretary Senior Vice President of Scudder Clerk
Kemper Investments, Inc.;
Associate, Dechert Price & Rhoads
(law firm), 1989 to 1997
</TABLE>
* Mr. Pierce and Ms. Quirk are considered by the Fund and its counsel to
be persons who are "interested persons" of the Adviser or of the Fund
(within the meaning of the 1940 Act).
** Unless otherwise stated, all the Trustees and officers have been
associated with their respective companies for more than five years,
but not necessarily in the same capacity.
= Messrs. Lovejoy, Marple and Pierce and Ms. Quirk are members of the
Executive Committee, which has the power to declare dividends from
ordinary income and distributions of realized capital gains to the same
extent as the Board is so empowered.
+ Address: Two International Place, Boston, Massachusetts
# Address: 345 Park Avenue, New York, New York
## Address: 222 South Riverside Plaza, Chicago, Illinois
To the knowledge of the Trust, as of May 31, 1999, all Trustees and
officers as a group owned beneficially (as that term is defined in Section 13(d)
of the Securities Exchange Act of 1934) 268,366 shares or 1.03% of the shares of
the Fund.
Certain accounts for which the Adviser acts as investment adviser owned
1,895,215 shares in the aggregate, or 7.32% of the outstanding shares on May 31,
1999. The Adviser may be deemed to be the beneficial owner of such shares but
disclaims any beneficial ownership in such shares.
To the best of the Fund's knowledge, as of May 31, 1999 no person owned
beneficially (as so defined) more than 5% of the Fund's outstanding shares
except as stated above.
The Trustees and officers of the Fund also serve in similar capacities
with respect to other Scudder Kemper funds.
REMUNERATION
Responsibilities of the Board -- Board and Committee Meetings
39
<PAGE>
The Board of Trustees is responsible for the general oversight of the
Fund's business. A majority of the Board's members are not affiliated with
Scudder Kemper. These "Independent Trustees" have primary responsibility for
assuring that the Fund is managed in the best interests of its shareholders.
The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational matters, including policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually, the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder services. In this regard, they evaluate, among other things, the
Fund's investment performance, the quality and efficiency of the various other
services provided, costs incurred by the Adviser and its affiliates and
comparative information regarding fees and expenses of competitive funds. They
are assisted in this process of the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.
All the Independent Trustees serve on the Committee on Independent
Trustees, which nominates Independent Trustees and considers other related
matters, and the Audit Committee, which selects the Fund's independent public
accountants and reviews accounting policies and controls. In addition,
Independent Trustees from time to time have established and served on task
forces and subcommittees focusing on particular matters such as investment,
accounting and shareholder service issues.
Compensation of Officers and Directors
The Independent Trustees receive the following compensation from the
Funds of Scudder Portfolio Trust: an annual Trustee's fee of $2,400 for a Fund
in which total net assets do not exceed $100 million; $4,800 for a Fund in which
total net assets exceed $100 million but do not exceed $1 billion and $7,200 for
a Fund in which total net assets exceed $1 billion; a fee of $150 for attendance
at each board meeting, audit committee meeting or other meeting held for the
purposes of considering arrangements between the Trust on behalf of each Fund
and the Adviser or any affiliate of the Adviser; $75 for all other committee
meetings; and reimbursement of expenses incurred for travel to and from Board
Meetings. The Independent Trustee who serves as lead or liaison trustee receives
an additional annual retainer fee of $500 from each Fund. No additional
compensation is paid to any Independent Trustee for travel time to meetings,
attendance at trustees' educational seminars or conferences, service on industry
or association committees, participation as speakers at trustees' conferences or
service on special trustee task forces or subcommittees. Independent Trustees do
not receive any employee benefits such as pension or retirement benefits or
health insurance. Notwithstanding the schedule of fees, the Independent Trustees
have in the past and may in the future waive a portion of their compensation.
The Independent Trustees of the Fund also serve as Independent Trustees
of certain other Scudder Funds, which enables them to address investment and
operational issues that are common to many of the Funds in a cost-efficient and
effective manner. During 1998, the Independent Trustees participated in 26
meetings of the Fund's board or board committees, which were held on 21
different days during the year.
The Independent Trustees also serve in the same capacity for other
funds managed by the Adviser. These funds differ broadly in type and complexity
and in some cases have substantially different Trustee fee schedules. The
following table shows the aggregate compensation received by each Independent
Trustee during 1998 from the Trust and from all of the Scudder funds as a group.
<TABLE>
<CAPTION>
Name Scudder GNMA Fund All Scudder Funds
- ---- ----------------- -----------------
<S> <C> <C>
Henry Becton, Jr., Trustee $6,023 $135,000 (28 funds)
Dawn-Marie Driscoll+, Trustee $6,450 $145,000 (28 funds)
Peter B. Freeman, Trustee $6,123 $172,425 (45 funds)
George M. Lovejoy, Jr., Trustee $6,023 $148,600 (29 funds)
Wesley W. Marple, Jr., Trustee $6,023 $135,000 (28 funds)
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<PAGE>
Name Scudder GNMA Fund All Scudder Funds
- ---- ----------------- -----------------
Jean C. Tempel, Trustee $6,034 $135,000 (29 funds)
</TABLE>
+ As Lead Trustee receives $500 more per year for Annual Retainer or $125
Quarterly as of 1/1/98.
Members of the Board of Trustees who are employees of the Adviser or
its affiliates receive no direct compensation from the Trust, although they are
compensated as employees of the Adviser, or its affiliates, as a result of which
they may be deemed to participate in fees paid by the Fund.
No fees were incurred by the Funds with respect to the alliance with B.A.T.
DISTRIBUTOR
The Fund has an underwriting agreement with Scudder Investor Services,
Inc., Two International Place, Boston, MA 02110 (the "Distributor"), a
Massachusetts corporation, which is a subsidiary of the Adviser, a Delaware
corporation. The Fund's underwriting agreement dated September 7, 1998 will
remain in effect until September 30, 1999, and from year to year thereafter only
if its continuance is approved annually by a majority of the members of the
Board of Trustees who are not parties to such agreement or interested persons of
any such party and either by a vote of a majority of the Board of Trustees or a
majority of the outstanding voting securities of the Fund. The underwriting
agreement was last approved by the Trustees on August 10, 1998.
Under the underwriting agreement, the Fund is responsible for: the
payment of all fees and expenses in connection with the preparation and filing
with the SEC of the registration statement and prospectus and any amendments and
supplements thereto; the registration and qualification of shares for sale in
the various states, including registering the Fund as a broker/dealer in various
states as required; the fees and expenses of preparing, printing and mailing
prospectuses annually to existing shareholders (see below for expenses relating
to prospectuses paid by the Distributor), notices, proxy statements, reports or
other communications to shareholders of the Fund; the cost of printing and
mailing confirmations of purchases of shares and any prospectuses accompanying
such confirmations; any issuance taxes and/or any initial transfer taxes; a
portion of shareholder toll-free telephone charges and expenses of shareholder
service representatives; the cost of wiring funds for share purchases and
redemptions (unless paid by the shareholder who initiates the transaction); the
cost of printing and postage of business reply envelopes; and a portion of the
cost of computer terminals used by both the Fund and the Distributor.
The Distributor will pay for printing and distributing prospectuses or
reports prepared for its use in connection with the offering of the Fund's
shares to the public and preparing, printing and mailing any other literature or
advertising in connection with the offering of the shares of the Fund to the
public. The Distributor will pay for all fees and expenses in connection with
its qualification and registration as a broker or dealer under federal and state
laws, a portion of the cost of toll-free telephone service and expenses of
shareholder service representatives, a portion of the cost of computer
terminals, and expenses of any activity which is primarily intended to result in
the sale of shares issued by the Fund, unless a Rule 12b-1 Plan is in effect
which provides that the Fund shall bear some or all of such expenses.
Note: Although the Fund does not currently have a 12b-1 Plan, the
Fund will also pay those fees and expenses permitted to be
paid or assumed by the Fund pursuant to a 12b-1 Plan, if any,
adopted by the Fund, notwithstanding any other provision to
the contrary in the underwriting agreement.
As agent, the Distributor currently offers the Fund's shares on a
continuous basis to investors in all states in which shares of the Fund may from
time to time be registered or where permitted by applicable law. The
underwriting agreement provides that the Distributor accepts orders for shares
at net asset value as no sales commission or load is charged to the investor.
The Distributor has made no firm commitment to acquire shares of the Fund.
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<PAGE>
TAXES
(See "Understanding Distributions and Taxes" in a Fund's prospectus.)
The Fund has elected to be treated as a regulated investment company
under Subchapter M of the Code, and has qualified as such since its inception.
It intends to continue to qualify for such treatment. Such qualification does
not involve governmental supervision or management of investment practices or
policy.
As a regulated investment company qualifying under Subchapter M of the
Code, the Fund is required to distribute to its shareholders at least 90% of its
investment company taxable income (including net short-term capital gain) and
generally is not subject to federal income tax to the extent that it distributes
annually its investment company taxable income and net realized capital gains in
the manner required under the Code. The Fund intends to distribute, at least
annually, all of its investment company taxable income and net realized capital
gains.
The Fund is subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires payment to shareholders during a calendar year of distributions
representing at least 98% of the Fund's ordinary income for the calendar year,
at least 98% of the excess of its capital gains over capital losses (adjusted
for certain ordinary losses) realized during the one-year period ending October
31 during such year (although investment companies with taxable years ending on
November 30 or December 31 may make an irrevocable election to measure the
required capital gain distribution using their actual taxable year), and all
ordinary income and capital gains for prior years that were not previously
distributed.
Investment company taxable income generally includes interest and net
short-term capital gains in excess of net long-term capital losses, less
expenses. Net realized capital gains for a fiscal year are computed by taking
into account any capital loss carryforward of the Fund.
If any net realized long-term capital gains in excess of net realized
short-term capital losses are retained by the Fund for reinvestment, requiring
federal income taxes to be paid thereon by the Fund, the Fund intends to elect
to treat such capital gains as having been distributed to shareholders. As a
result, each shareholder will report such capital gains as long-term capital
gains, will be able to claim a proportionate share of federal income taxes paid
by the Fund on such gains as a credit against the shareholder's federal income
tax liability, and will be entitled to increase the adjusted tax basis of the
shareholder's Fund shares by the difference between such reported gains and the
shareholder's tax credit. If a Fund makes such an election, it may not be
treated as having met the excise tax distribution requirement.
At January 31, 1999, the Fund had a net tax basis capital loss
carryforward of approximately $18,017,000 which may be applied against any
realized net taxable capital gains of each succeeding year until fully utilized
or until March 31, 2003, the expiration date.
Distributions of investment company taxable income are taxable to
shareholders as ordinary income.
Since no portion of the Fund's income is comprised of dividends from
domestic corporations, none of the income distributions of the Fund are eligible
for the deduction for dividends received by corporations.
Properly designated distributions of the excess of net long-term
capital gain over net short-term capital loss are taxable to shareholders as
long-term capital gains, regardless of the length of time the shares of the Fund
have been held by such shareholders. Such distributions are not eligible for the
dividends-received deduction. Any loss realized upon the redemption of shares
held at the time of redemption for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain during such six-month period.
Distributions of investment company taxable income and net realized
capital gains will be taxable as described above, whether received in shares or
in cash. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share on the reinvestment
date.
All distributions of investment company taxable income and net realized
capital gain, whether received in shares or in cash, must be reported by each
shareholder on the shareholder's federal income tax return. Dividends
42
<PAGE>
declared in October, November or December with a record date in such a month are
deemed to have been received by shareholders on December 31 if paid in January
of the following year. Redemptions of shares, including exchanges for shares of
another Scudder fund, may result in tax consequences (gain or loss) to the
shareholder and are also subject to these reporting requirements.
A qualifying individual may make a deductible IRA contribution of up to
$2,000 or, if less, the amount of the individual's earned income (up to $2,000
per individual for married couples if only one spouse has earned income) for any
taxable year only if (i) neither the individual nor a spouse (unless filing
separate returns) is an active participant in an employer's retirement plan, or
(ii) the individual (and a spouse, if applicable) has an adjusted gross income
below a certain level ($40,050 for married individuals filing a joint return,
with a phase-out of the deduction for adjusted gross income between $40,050 and
$50,000; $25,050 for a single individual, with a phase-out for adjusted gross
income between $25,050 and $35,000). However, an individual not permitted to
make a deductible contribution to an IRA for any such taxable year may
nonetheless make nondeductible contributions up to $2,000 to an IRA for that
year. There are special rules for determining how withdrawals are to be taxed if
an IRA contains both deductible and nondeductible amounts. In general, a
proportionate amount of each withdrawal will be deemed to be made from
nondeductible contributions; amounts treated as a return of nondeductible
contributions will not be taxable. Also, annual contributions may be made to a
spousal IRA even if the spouse has earnings in a given year if the spouse elects
to be treated as having no earnings (for IRA contribution purposes) for the
year. (Different provisions may apply to Roth IRAs. See discussion above under
Special Plan Accounts.)
Distributions by the Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution may nevertheless be taxable to the
shareholder as ordinary income or capital gain as described above, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should consider the tax implications of buying shares just
prior to a distribution. The price of shares purchased at that time includes the
amount of the forthcoming distribution. Those purchasing just prior to a
distribution will then receive a partial return of capital upon the
distribution, which will nevertheless be taxable to them.
A portion of the difference between the issue price of zero coupon
securities and their face value ("original issue discount") is considered to be
income to the Fund each year, even though the Fund will not receive cash
interest payments from these securities. This original issue discount (imputed
income) will comprise a part of the investment company taxable income of the
Fund which must be distributed to shareholders in order to maintain the
qualification of the Fund as a regulated investment company and to avoid federal
income tax at the Fund level. Shareholders will be subject to income tax on such
original issue discount, whether or not they elect to receive their
distributions in cash. In the event that a Fund acquires a debt instrument at a
market discount, it is possible that a portion of any gain recognized on the
disposition of such instrument will be reclassed to ordinary income.
In general, no loss is recognized by the Fund upon payment of a premium
in connection with the purchase of a put or call option. The character of any
gain or loss recognized (i.e., long-term or short-term) generally depends, in
the case of a lapse or sale of the option, on the Fund's holding period for the
option, and in the case of an exercise of a put option, on the Fund's holding
period for the underlying security. The purchase of a put option may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or a substantially identical security
in the Fund's portfolio. If the Fund writes a put or call option, no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is treated as a short-term capital gain or loss. If a call
option written by the Fund is exercised, the character of the gain or loss
depends on the holding period of the underlying security. The exercise of a put
option written by the Fund is not a taxable transaction for the Fund.
Many futures and forward contracts entered into by the Fund and all
listed nonequity options written or purchased by the Fund (including listed
options on debt securities and options on futures contracts), will be governed
by Section 1256 of the Code. Absent a tax election to the contrary, gain or loss
attributable to the lapse, exercise or closing out of any such position
generally will be treated as 60% long-term and 40% short-term, and on the last
trading day of the Fund's fiscal year, (and generally, on October 31 for
purposes of the 4% excise tax) all outstanding Section 1256 positions will be
marked to market (i.e., treated as if such positions were closed out at their
closing price on such day), with any resulting gain or loss recognized as 60%
long-term and 40% short-term. Under certain circumstances, entry into a futures
contract to sell a security may constitute a short sale for federal income tax
purposes, causing an adjustment in the holding period of the underlying security
or a substantially identical security in the Fund's portfolio.
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<PAGE>
Positions of the Fund which consist of at least one position not
governed by Section 1256 and at least one futures contract or nonequity option
governed by Section 1256 which substantially diminishes the Fund's risk of loss
with respect to such other position will be treated as a "mixed straddle."
Although mixed straddles are subject to the straddle rules of Section 1092 of
the Code, the operation of which may cause deferral of losses, adjustments in
the holding periods of securities, and conversion of short-term capital losses
into long-term capital losses, certain tax elections exist for them which reduce
or eliminate the operation of these rules. The Fund will monitor its
transactions in options and futures and may make certain tax elections in
connection with these investments.
Notwithstanding any of the foregoing, recent tax law changes may
require the Fund to recognize gain (but not loss) from a constructive sale of
certain "appreciated financial positions" if the Fund enters into a short sale,
offsetting notional principal contract, futures or forward contract transaction
with respect to the appreciated position or substantially identical property.
Appreciated financial positions subject to this constructive sale treatment are
interests (including options, futures and forward contracts and short sales) in
stock, partnership interests, certain actively traded trust instruments and
certain debt instruments. Constructive sale treatment of appreciated financial
positions does not apply to certain transactions closed in the 90-day period
ending with the 30th day after the close of the Fund's taxable year, if certain
conditions are met.
Similarly, if the Fund enters into a short sale of property that
becomes substantially worthless, the Fund will be required to recognize gain at
that time as though it had closed the short sale. Future regulations may apply
similar treatment to other strategic transactions with respect to property that
becomes substantially worthless.
The Fund will be required to report to the IRS all distributions of
taxable income and capital gains as well as gross proceeds from the redemption
or exchange of Fund shares, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Section 3406 of the Code,
distributions of taxable income and capital gains and proceeds from the
redemption or exchange of the shares of a regulated investment company may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the investment company with their
taxpayer identification numbers and with required certifications regarding their
status under the federal income tax law. Withholding may also be required if a
Fund is notified by the IRS or a broker that the taxpayer identification number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld.
Shareholders of the Fund may be subject to state and local taxes on
distributions received from the Fund and on redemptions of the Fund's shares.
Under the laws of certain states, distributions of investment company taxable
income are taxable to shareholders as dividends, even though a portion of such
distributions may be derived from interest on U.S. Government obligations which,
if received directly by such shareholders, would be exempt from state income
tax.
The Fund is organized as a Massachusetts business trust and, provided
that it qualifies as a regulated investment company for federal income tax
purposes, is not liable for any income or franchise tax in the Commonwealth of
Massachusetts.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons, i.e., U.S. citizens and
residents and U.S. corporations, partnerships, trusts and estates. Each
shareholder who is not a U.S. person should consider the U.S. and foreign tax
consequences of ownership of shares of the Fund, including the possibility that
such a shareholder may be subject to a U.S. withholding tax at a rate of 30% (or
at a lower rate under an applicable income tax treaty) on amounts constituting
ordinary income received by the shareholder, where such amounts are treated as
income from U.S. sources under the Code.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
44
<PAGE>
PORTFOLIO TRANSACTIONS
Brokerage Commissions
Allocation of brokerage is supervised by the Adviser.
The primary objective of the Adviser in placing orders for the purchase
and sale of securities for the Fund is to obtain the most favorable net results,
taking into account such factors as price, commission where applicable, size of
order, difficulty of execution and skill required of the executing
broker/dealer. The Adviser seeks to evaluate the overall reasonableness of
brokerage commissions paid (to the extent applicable) through the familiarity of
the Distributor with commissions charged on comparable transactions, as well as
by comparing commissions paid by the Fund to reported commissions paid by
others. The Adviser routinely reviews commission rates, execution and settlement
services performed and makes internal and external comparisons.
The Fund's purchases and sales of fixed-income securities are generally
placed by the Adviser with primary market makers for these securities on a net
basis, without any brokerage commission being paid by the Fund. Trading does,
however, involve transaction costs. Transactions with dealers serving as primary
market makers reflect the spread between the bid and asked prices. Purchases of
underwritten issues may be made, which will include an underwriting fee paid to
the underwriter.
When it can be done consistently with the policy of obtaining the most
favorable net results, it is the Adviser's practice to place such orders with
broker/dealers who supply brokerage and research services to the Adviser or the
Fund. The term "research services" includes advice as to the value of
securities; the advisability of investing in, purchasing or selling securities;
the availability of securities or purchasers or sellers of securities; and
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts. The
Adviser is authorized when placing portfolio transactions, if applicable, for
the Fund to pay a brokerage commission in excess of that which another broker
might charge for executing the same transaction on account of execution services
and the receipt of research services. The Adviser has negotiated arrangements,
which are not applicable to most fixed-income transactions, with certain
broker/dealers pursuant to which a broker/dealer will provide research services,
to the Adviser or the Fund in exchange for the direction by the Adviser of
brokerage transactions to the broker/dealer. These arrangements regarding
receipt of research services generally apply to equity security transactions.
The Adviser will not place orders with a broker/dealer on the basis that the
broker/dealer has or has not sold shares of the Fund. In effecting transactions
in over-the-counter securities, orders are placed with the principal market
makers for the security being traded unless, after exercising care, it appears
that more favorable results are available elsewhere.
To the maximum extent feasible, it is expected that the Adviser will
place orders for portfolio transactions through the Distributor, which is a
corporation registered as a broker/dealer and a subsidiary of the Adviser; the
Distributor will place orders on behalf of the Fund with issuers, underwriters
or other brokers and dealers. The Distributor will not receive any commission,
fee or other remuneration from the Fund for this service.
Although certain research services from broker/dealers may be useful to
the Fund and to the Adviser, it is the opinion of the Adviser that such
information only supplements the Adviser's own research effort since the
information must still be analyzed, weighed, and reviewed by the Adviser's
staff. Such information may be useful to the Adviser in providing services to
clients other than the Fund, and not all such information is used by the Adviser
in connection with the Fund. Conversely, such information provided to the
Adviser by broker/dealers through whom other clients of the Adviser effect
securities transactions may be useful to the Adviser in providing services to
the Fund.
The Trustees review from time to time whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
For the fiscal years ended March 31, 1998, 1997 and 1996, the Fund paid no
brokerage commissions or underwriting discounts.
Portfolio Turnover
Fund securities may be sold to take advantage of investment
opportunities arising from changing market levels or yield relationships.
Although such transactions involve additional costs in the form of spreads or
commissions, they
45
<PAGE>
will be undertaken in an effort to improve the overall investment return of the
Fund, consistent with the Fund's objectives. The portfolio turnover rate
(defined by the SEC as the ratio of the lesser of sales or purchases to the
monthly average value of such securities owned during the year, excluding all
securities whose remaining maturities at the time of acquisition were one year
or less) for the ten months ended January 31, 1999 was 280.8% and for the fiscal
years ended March 31, 1998 and 1997 was 197% and 188%, respectively. The
portfolio turnover rates including mortgage dollar roll transactions were
289.9%, 250.8%, 255.4% and 392.5%, for the periods ended January 31, 1999, March
31, 1998, 1995 and 1994, respectively.)
Recent economic and market conditions have necessitated more active
trading, resulting in a higher portfolio turnover rate. A higher rate involves
greater transaction costs to the Fund and may result in the realization of net
capital gains, which would be taxable to shareholders when distributed.
NET ASSET VALUE
The net asset value of shares of the Fund is computed as of the close
of regular trading on the Exchange on each day the Exchange is open for trading
(the "Value Time"). The Exchange is scheduled to be closed on the following
holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Net asset value per share is
determined by dividing the value of the total assets of the Fund, less all
liabilities, by the total number of shares outstanding.
An exchange-traded equity security is valued at its most recent sale
price on the exchange it is traded as of the Value Time. Lacking any sales, the
security is valued at the calculated mean between the most recent bid quotation
and the most recent asked quotation (the "Calculated Mean") on such exchange as
of the Value Time. Lacking a Calculated Mean quotation the security is valued at
the most recent bid quotation on such exchange as of the Value Time. An equity
security which is traded on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") system will be valued at its most recent sale
price on such system as of the Value Time. Lacking any sales, the security will
be valued at the most recent bid quotation as of the Value Time. The value of an
equity security not quoted on the Nasdaq system, but traded in another
over-the-counter market, is its most recent sale price if there are any sales of
such security on such market as of the Value Time. Lacking any sales, the
security is valued at the Calculated Mean quotation for such security as of the
Value Time. Lacking a Calculated Mean quotation the security is valued at the
most recent bid quotation as of the Value Time.
Debt securities, other than money market instruments, are valued at
prices supplied by the Fund's pricing agent(s) which reflect broker/dealer
supplied valuations and electronic data processing techniques. Money market
instruments with an original maturity of sixty days or less maturing at par
shall be valued at amortized cost, which the Board believes approximates market
value. If it is not possible to value a particular debt security pursuant to
these valuation methods, the value of such security is the most recent bid
quotation supplied by a bona fide marketmaker. If it is not possible to value a
particular debt security pursuant to the above methods, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.
An exchange traded options contract on securities, currencies, futures
and other financial instruments is valued at its most recent sale price on such
exchange. Lacking any sales, the options contract is valued at the Calculated
Mean. Lacking any Calculated Mean, the options contract is valued at the most
recent bid quotation in the case of a purchased options contract, or the most
recent asked quotation in the case of a written options contract. An options
contract on securities, currencies and other financial instruments traded
over-the-counter is valued at the most recent bid quotation in the case of a
purchased options contract and at the most recent asked quotation in the case of
a written options contract. Futures contracts are valued at the most recent
settlement price. Foreign currency exchange forward contracts are valued at the
value of the underlying currency at the prevailing exchange rate.
If a security is traded on more than one exchange, or upon one or more
exchanges and in the over-the-counter market, quotations are taken from the
market in which the security is traded most extensively.
If, in the opinion of the Fund's Valuation Committee, the value of a
portfolio asset as determined in accordance with these procedures does not
represent the fair market value of the portfolio asset, the value of the
portfolio asset is taken to be an amount which, in the opinion of the Valuation
Committee, represents fair market value on the basis of all
46
<PAGE>
available information. The value of other portfolio holdings owned by the Fund
is determined in a manner which, in the discretion of the Valuation Committee
most fairly reflects fair market value of the property on the valuation date.
Following the valuations of securities or other portfolio assets in
terms of the currency in which the market quotation used is expressed ("Local
Currency"), the value of these portfolio assets in terms of U.S. dollars is
calculated by converting the Local Currency into U.S. dollars at the prevailing
currency exchange rate on the valuation date.
ADDITIONAL INFORMATION
Experts
The Financial highlights of the Fund included in the Fund's prospectus
and the Financial Statement incorporated by reference in this Statement of
Additional Information have been so included or incorporated by reference in
reliance on the report of PricewaterhouseCoopers LLP, One Post Office Square,
Boston, Massachusetts 02109, independent accountants, and given on the authority
of that firm as experts in accounting and auditing. PricewaterhouseCoopers LLP
is responsible for performing annual audits of the financial statements and
financial highlights of the Fund in accordance with generally accepted auditing
standards, and the preparation of federal tax returns.
Shareholder Indemnification
The Fund is an organization of the type commonly known as a
Massachusetts business trust. Under Massachusetts law, shareholders of such a
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Fund. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund property or the
acts, obligations or affairs of the Fund. The Declaration of Trust also provides
for indemnification out of the Fund property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason of being or having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
Other Information
The CUSIP number of the Fund is 81114V-10-4.
The Fund has a fiscal year end of January 31.
Portfolio securities of the Fund are held separately, pursuant to a
custodian agreement, by the Fund's custodian, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02101.
The law firm of Dechert Price & Rhoads is counsel to the Fund.
The name "Scudder GNMA Fund" is the designation of the Fund for the
time being under an Amended and Restated Declaration of Trust dated November 3,
1987, as amended from time to time, and all persons dealing with the Fund must
look solely to the property of the Fund for the enforcement of any claims
against the Fund as neither the Trustees, officers, agents nor shareholders
assume any personal liability for obligations entered into on behalf of the
Fund. Upon the initial purchase of shares, the shareholder agrees to be bound by
the Trust's Declaration of Trust, as amended from time to time. The Declaration
of the Trust is on file at the Massachusetts Secretary of State's office in
Boston, Massachusetts.
Scudder Fund Accounting Corporation, Two International Place, Boston,
Massachusetts, 02210-4103, a subsidiary of the Adviser, computes net asset value
for the Fund. The Fund pays Scudder Fund Accounting Corporation an annual fee
equal to 0.025% of the first $150 million of average daily net assets, 0.0075%
of such assets in excess of $150 million, 0.0045% of such assets in excess of $1
billion, plus holding and transaction charges for this service. The fees
incurred by the Fund for the years ended March 31, 1998, 1997 and 1996 amounted
to $68,114, $112,508 and $95,411, respectively. For the ten months ended January
31, 1999, fees amounted to $69,236, of which $7,612 was
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<PAGE>
unpaid on January 31, 1999. Scudder Fund Accounting Corporation assumed
responsibility for determining the daily net asset value per share and
maintaining the portfolio and general accounting records for the Fund on May 9,
1995.
Scudder Service Corporation ("Service Corporation"), P.O. Box 2291,
Boston, Massachusetts 02107-2291, a subsidiary of the Adviser, is the transfer,
dividend-paying and shareholder service agent for the Fund and also provides
subaccounting and recordkeeping services for shareholder accounts in certain
retirement and employee benefit plans. The Fund pays Service Corporation an
annual fee of $26.00 for each account maintained for a shareholder. The fees
incurred by the Fund for the fiscal years ended March 31, 1998, 1997 and 1996
amounted to $597,013, $601,383 and $787,701, respectively. For the ten months
ended January 31, 1999, fees amounted to $485,001, of which $96,549 was unpaid
on January 31, 1999.
The Fund, or the Adviser (including any affiliate of the Adviser), or
both, may pay unaffiliated third parties for providing recordkeeping and other
administrative services with respect to accounts of participants in retirement
plans or other beneficial owners of Fund shares whose interests are generally
held in an omnibus account.
Scudder Trust Company, a subsidiary of the Adviser, provides
recordkeeping and other services in connection with certain retirement and
employee benefit plans. Annual service fees are paid by the Fund to Scudder
Trust Company, Two International Place, Boston, Massachusetts 02110-4103 for
such accounts. The Fund pays Scudder Trust Company an annual fee of $29.00 per
shareholder account. The Fund incurred fees of $170,217, $176,074 and $164,073
for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. For the
ten months ended January 31, 1999, fees amounted to $146,387, of which $28,190
was unpaid on January 31, 1999.
The Fund's prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement and its amendments
which the Fund has filed with the SEC under the 1933 Act and reference is hereby
made to the Registration Statement for further information with respect to the
Fund and the securities offered hereby. This Registration Statement and its
amendments are available for inspection by the public at the SEC in Washington,
D.C.
FINANCIAL STATEMENTS
The financial statements, including the investment portfolio of the
Fund, together with the Report of Independent Accountants, Financial Highlights
and notes to financial statements, are incorporated herein by reference to the
Annual Report to the Shareholders of the Fund dated January 31, 1999 and are
hereby deemed to be a part of this Statement of Additional Information.
48
<PAGE>
SCUDDER GNMA FUND
PART C. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits:
- -------- ---------
<S> <C> <C>
(a) (a)(1) Amended and Restated Declaration of Trust of the Registrant dated
November 3, 1987. (Incorporated by reference to Post-Effective
Amendment No. 14 to the Registration Statement.)
(a)(2) Amendment to Amended and Restated Declaration of Trust dated
November 13, 1990. (Incorporated by reference to Post-Effective
Amendment No. 14 to the Registration Statement.)
(b) (b)(1) Amended and Restated By-Laws of the Registrant dated
April 5, 1985. (Incorporated by reference to Post-Effective
Amendment No. 14 to the Registration Statement.)
(b)(2) Amendment to Amended and Restated By-Laws of the Registrant dated
August 13, 1991. (Incorporated by reference to Post-Effective
Amendment No. 14 to the Registration Statement.)
(b)(3) Amendment to Amended and Restated By-Laws of the Registrant dated
November 11, 1991. (Incorporated by reference to Post-Effective
Amendment No. 14 to the Registration Statement.)
(c) Inapplicable
(d) (d)(1) Investment Management Agreement between the Registrant and Scudder
Kemper Investments, Inc. dated September 7, 1998. (Incorporated by
reference to Post-Effective Amendment No. 17 to the Registration
Statement.)
(e) (e)(1) Underwriting Agreement between the Registrant and Scudder Investor
Services, Inc., formerly Scudder Fund Distributors, Inc., dated
September 7, 1998. (Incorporated by reference to Post-Effective
Amendment No. 17 to the Registration Statement.)
(f) Inapplicable
(g) (g)(1) Custodian Agreement between the Registrant and State Street Bank
and Trust Company dated July 3, 1985. (Incorporated by reference
to Post-Effective Amendment No. 14 to the Registration Statement.)
(g)(2) Amendment dated August 9, 1988 to Custodian Agreement between the
Registrant and State Street Bank and Trust Company dated July 3,
1985. (Incorporated by reference to Post-Effective Amendment No.
14 to the Registration Statement.)
(g)(3) Fee schedule for Exhibit (g)(1). (Incorporated by reference to
Post-Effective Amendment No. 14 to the Registration Statement.)
(g)(4) Revised fee schedule for Exhibit (g)(1). (Incorporated by
reference to Post-Effective Amendment No. 12 to the Registration
Statement.)
<PAGE>
(g)(5) Amendment dated February 8, 1999 to Custodian Agreement between
the Registrant and State Street Bank and Trust Company dated July
3, 1985.
(Incorporated by reference to Post-Effective Amendment No. 19 to
the Registration Statement.)
(h) (h)(1) Transfer Agency and Service Agreement between the Registrant and
Scudder Service Corporation dated October 2, 1989. (Incorporated
by reference to Post-Effective Amendment No. 14 to the
Registration Statement.)
(h)(2) Fee schedule for Exhibit (h)(1).
(Incorporated by reference to Post-Effective Amendment No. 7 to
the Registration Statement.)
(h)(3) Revised fee schedule dated October 1, 1995 for Exhibit (h)(1).
(Incorporated by reference to Post-Effective Amendment No. 13 to
the Registration Statement.)
(h)(4) Revised fee schedule dated October 1, 1996 for Exhibit (h)(1).
(Incorporated by reference to Post-Effective Amendment No. 15 to
the Registration Statement.)
(h)(5) COMPASS Service Agreement between the Registrant and Scudder Trust
Company dated January 1, 1990.
(Incorporated by reference to Post-Effective Amendment No. 15 to
the Registration Statement.)
(h)(6) COMPASS and Trak 2000 Service Agreement between Scudder Trust
Company and the Registrant dated October 1, 1995. (Incorporated
by reference to Post-Effective Amendment No. 13 to the
Registration Statement.)
(h)(7) Fee Schedule for Exhibit (h)(5).
(Incorporated by reference to Post-Effective Amendment No. 14 to
the Registration Statement.)
(h)(8) Shareholder Services Agreement between the Registrant and Charles
Schwab & Co., Inc. dated June 1, 1990. (Incorporated by reference
to Post-Effective Amendment No. 14 to the Registration Statement.)
(h)(9) Revised fee schedule dated October 1, 1996 for Exhibit (h)(8).
(Incorporated by reference to Post-Effective Amendment No. 14 to
the Registration Statement.)
(h)(10) Fund Accounting Services Agreement between the Registrant and
Scudder Fund Accounting Corporation dated May 9, 1995.
(Incorporated by reference to Post-Effective Amendment No. 12 to
the Registration Statement.)
(i) Consent of Legal Counsel is filed herein.
(j) Consent of Independent Accountants is filed herein.
(k) Inapplicable
2
<PAGE>
(l) Inapplicable
(m) Inapplicable
(n) Article 6 Financial Data Schedules are filed herein.
(o) Inapplicable
</TABLE>
Power of Attorney filed as part of the signature page
of Post-Effective Amendment No. 8. to the
Registration Statement, as part of the signature page
of Post-Effective Amendment No.12 to the Registration
Statement and as part of the signature page of
Post-Effective Amendment No.16 to the Registration
Statement.
Item 24. Persons Controlled by or under Common Control with Registrant.
- -------- --------------------------------------------------------------
None.
Item 25. Indemnification.
- -------- ----------------
A policy of insurance covering Scudder Kemper Investments,
Inc., its subsidiaries including Scudder Investor Services,
Inc., and all of the registered investment companies advised
by Scudder Kemper Investments, Inc. insures the Registrant's
Trustees and officers and others against liability arising by
reason of an alleged breach of duty caused by any negligent
act, error or accidental omission in the scope of their
duties.
Article IV of Registrant's Amended and Restated Declaration of
Trust states as follows:
Section 4.1. No Personal Liability of Shareholders, Trustees,
etc. No Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. No Trustee,
officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than to
the Trust or its Shareholders, in connection with Trust
Property or the affairs of the Trust, save only that arising
from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties with respect to such Person;
and all such Persons shall look solely to the Trust Property
for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee,
officer, employee, or agent, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability
of the Trust, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each
Shareholder harmless from and against all claims and
liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall
reimburse such Shareholder for all legal and other expenses
reasonably incurred by him in connection with any such claim
or liability. The indemnification and reimbursement required
by the preceding sentence shall be made only out of the assets
of the one or more Series of which the Shareholder who is
entitled to indemnification or reimbursement was a Shareholder
at the time of the act or event occurred which gave rise to
the claim against or liability of said Shareholder. The rights
accruing to a Shareholder under this Section 4.1 shall not
impair any other right to which such Shareholder may be
lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a
Shareholder in any appropriate situation even though not
specifically provided herein.
Section 4.2. Non-Liability of Trustees, etc. No Trustee,
officer, employee or agent of the Trust shall be liable to the
Trust, its Shareholders, or to any Shareholder, Trustee,
officer, employee, or agent thereof for any action or failure
to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance,
gross negligence or reckless disregard of the duties involved
in the conduct of his office.
3
<PAGE>
Section 4.3 Mandatory Indemnification. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is, or has been, a Trustee or
officer of the Trust shall be indemnified by the
Trust to the fullest extent permitted by law against
all liability and against all expenses reasonably
incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against
amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions,
suits or proceedings (civil, criminal, administrative
or other, including appeals), actual or threatened;
and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Trustee or officer:
(i) against any liability to the Trust, a Series
thereof, or the Shareholders by reason of a final
adjudication by the court or other body before which
the proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of
his office;
(ii) with respect to any matter as to which he shall
have been finally adjudicated not to have acted in
good faith in the reasonable belief that his action
was in the best interest of the Trust;
(iii) in the event of a settlement or other
disposition not involving a final adjudication as
provided in paragraph (b)(i) or (b)(ii) resulting in
a payment by a Trustee or officer, unless there has
been a determination that such Trustee or officer did
not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office:
(A) by the court or other body approving the
settlement or other disposition; or
(B) based upon a review of readily available
facts (as opposed to a full trial-type
inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter
(provided that a majority of the
Disinterested Trustees then in office act on
the matter) or (y) written opinion of
independent legal counsel.
(c) The rights of indemnification herein provided may be
insured against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any
Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs,
executors, administrators and assigns of such a person.
Nothing contained herein shall affect any rights to
indemnification to which personnel of the Trust other than
Trustees and officers may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense to
any claim, action, suit or proceeding of the character
described in paragraph (a) of this Section 4.3 may be advanced
by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided
that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security provided by the
recipient, or the Trust shall be insured against
losses arising out of any such advances; or
4
<PAGE>
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the
Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall
determine, based upon a review of readily available
facts (as opposed to a full trial-type inquiry), that
there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4.3, a "Disinterested
Trustee" is one who is not (i) an Interested Person of the
Trust (including anyone who has been exempted from being an
Interested Person by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or
proceeding.
Item 26. Business or Other Connections of Investment Adviser
- -------- ---------------------------------------------------
Scudder Kemper Investments, Inc. has stockholders and
employees who are denominated officers but do not as such have
corporation-wide responsibilities. Such persons are not
considered officers for the purpose of this Item 26.
<TABLE>
<CAPTION>
Business and Other Connections of Board
Name of Directors of Registrant's Adviser
---- ------------------------------------
<S> <C>
Stephen R. Beckwith Treasurer and Chief Financial Officer, Scudder Kemper Investments, Inc.**
Vice President and Treasurer, Scudder Fund Accounting Corporation*
Director, Scudder Stevens & Clark Corporation**
Director and Chairman, Scudder Defined Contribution Services, Inc.**
Director and President, Scudder Capital Asset Corporation**
Director and President, Scudder Capital Stock Corporation**
Director and President, Scudder Capital Planning Corporation**
Director and President, SS&C Investment Corporation**
Director and President, SIS Investment Corporation**
Director and President, SRV Investment Corporation**
Lynn S. Birdsong Director and Vice President, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark (Luxembourg) S.A.#
William H. Bolinder Director, Scudder Kemper Investments, Inc.**
Member Group Executive Board, Zurich Financial Services, Inc. ##
Chairman, Zurich-American Insurance Company o
Laurence W. Cheng Director, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland ##
Director, ZKI Holding Corporation xx
Gunther Gose Director, Scudder Kemper Investments, Inc.**
CFO, Member Group Executive Board, Zurich Financial Services, Inc. ##
CEO/Branch Offices, Zurich Life Insurance Company ##
Rolf Huppi Director, Chairman of the Board, Scudder Kemper Investments, Inc.**
Member, Corporate Executive Board, Zurich Insurance Company of Switzerland##
Director, Chairman of the Board, Zurich Holding Company of America o
Director, ZKI Holding Corporation xx
Kathryn L. Quirk Chief Legal Officer, Chief Compliance Officer and Secretary, Scudder Kemper
Investments, Inc.**
Director, Senior Vice President & Assistant Clerk, Scudder Investor Services, Inc.*
Director, Vice President & Secretary, Scudder Fund Accounting Corporation*
Director, Vice President & Secretary, Scudder Realty Holdings Corporation*
Director & Assistant Clerk, Scudder Service Corporation*
Director, SFA, Inc.*
Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc.***
5
<PAGE>
Director, Scudder, Stevens & Clark Japan, Inc.***
Director, Vice President and Secretary, Scudder, Stevens & Clark of Canada, Ltd.***
Director, Vice President and Secretary, Scudder Canada Investor Services Limited***
Director, Vice President and Secretary, Scudder Realty Advisers, Inc. x
Director and Secretary, Scudder, Stevens & Clark Corporation**
Director and Secretary, Scudder, Stevens & Clark Overseas Corporation oo
Director and Secretary, SFA, Inc.*
Director, Vice President and Secretary, Scudder Defined Contribution Services, Inc.**
Director, Vice President and Secretary, Scudder Capital Asset Corporation**
Director, Vice President and Secretary, Scudder Capital Stock Corporation**
Director, Vice President and Secretary, Scudder Capital Planning Corporation**
Director, Vice President and Secretary, SS&C Investment Corporation**
Director, Vice President and Secretary, SIS Investment Corporation**
Director, Vice President and Secretary, SRV Investment Corporation**
Director, Vice President and Secretary, Scudder Financial Services, Inc.*
Director, Korea Bond Fund Management Co., Ltd.+
Cornelia M. Small Director and Vice President, Scudder Kemper Investments, Inc.**
Edmond D. Villani Director, President and Chief Executive Officer, Scudder Kemper Investments, Inc.**
Director, Scudder, Stevens & Clark Japan, Inc.###
President and Director, Scudder, Stevens & Clark Overseas Corporation oo
President and Director, Scudder, Stevens & Clark Corporation**
Director, Scudder Realty Advisors, Inc.x
Director, IBJ Global Investment Management S.A. Luxembourg, Grand-Duchy of Luxembourg
</TABLE>
* Two International Place, Boston, MA
x 333 South Hope Street, Los Angeles, CA
** 345 Park Avenue, New York, NY
# Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg,
R.C. Luxembourg B 34.564
*** Toronto, Ontario, Canada
xxx Grand Cayman, Cayman Islands, British West Indies
oo 20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
### 1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
xx 222 S. Riverside, Chicago, IL
o Zurich Towers, 1400 American Ln., Schaumburg, IL
+ P.O. Box 309, Upland House, S. Church St., Grand Cayman,
British West Indies
## Mythenquai-2, P.O. Box CH-8022, Zurich, Switzerland
Item 27. Principal Underwriters.
- -------- -----------------------
(a)
Scudder Investor Services, Inc. acts as principal underwriter of the
Registrant's shares and also acts as principal underwriter for other
funds managed by Scudder Kemper Investments, Inc.
(b)
The Underwriter has employees who are denominated officers of an
operational area. Such persons do not have corporation-wide
responsibilities and are not considered officers for the purpose of
this Item 27.
6
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
<S> <C> <C>
Lynn S. Birdsong Senior Vice President None
345 Park Avenue
New York, NY 10154
Mary Elizabeth Beams Vice President None
Two International Place
Boston, MA 02110
Mark S. Casady Director, President and Assistant None
Two International Place Treasurer
Boston, MA 02110
Linda Coughlin Director and Senior Vice President None
Two International Place
Boston, MA 02110
Richard W. Desmond Vice President None
345 Park Avenue
New York, NY 10154
Paul J. Elmlinger Senior Vice President and Assistant None
345 Park Avenue Clerk
New York, NY 10154
Philip S. Fortuna Vice President None
101 California Street
San Francisco, CA 94111
William F. Glavin Vice President None
Two International Place
Boston, MA 02110
Margaret D. Hadzima Assistant Treasurer None
Two International Place
Boston, MA 02110
John R. Hebble Assistant Treasurer Treasurer
Two International Place
Boston, MA 02110
Thomas W. Joseph Director, Vice President, Treasurer Vice President
Two International Place and Assistant Clerk
Boston, MA 02110
7
<PAGE>
Name and Principal Position and Offices with Positions and
Business Address Scudder Investor Services, Inc. Offices with Registrant
---------------- ------------------------------- -----------------------
James J. McGovern Chief Financial Officer None
345 Park Avenue
New York, NY 10154
Lorie C. O'Malley Vice President None
Two International Place
Boston, MA 02110
Caroline Pearson Clerk Assistant Secretary
Two International Place
Boston, MA 02110
Daniel Pierce Director, Vice President President and Trustee
Two International Place and Assistant Treasurer
Boston, MA 02110
Kathryn L. Quirk Director, Senior Vice President, Chief Trustee, Vice President
345 Park Avenue Legal Officer and Assistant Clerk and Assistant Secretary
New York, NY 10154
Robert A. Rudell Director and Vice President None
Two International Place
Boston, MA 02110
William M. Thomas Vice President None
Two International Place
Boston, MA 02110
Benjamin Thorndike Vice President None
Two International Place
Boston, MA 02110
Sydney S. Tucker Vice President None
Two International Place
Boston, MA 02110
Linda J. Wondrack Vice President and Chief Compliance None
Two International Place Officer
Boston, MA 02110
</TABLE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions Brokerage Other
Underwriter Commissions and Repurchases Commissions Compensation
----------- ----------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Scudder Investor None None None None
Services, Inc.
</TABLE>
Item 28. Location of Accounts and Records.
- -------- ---------------------------------
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the Rules
promulgated thereunder are maintained by Scudder Kemper
Investments, Inc., Two International Place, Boston, MA
02110-4103. Records relating to the duties of the Registrant's
8
<PAGE>
custodian are maintained by State Street Bank and Trust
Company, Heritage Drive, North Quincy, Massachusetts. Records
relating to the duties of the Registrant's transfer agent are
maintained by Scudder Service Corporation, Two International
Place, Boston, Massachusetts.
Item 29. Management Services.
- -------- --------------------
Inapplicable.
Item 30. Undertakings.
- -------- -------------
Inapplicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on June 16, 1999.
SCUDDER GNMA FUND
By /s/ DANIEL PIERCE
-----------------
Daniel Pierce, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ HENRY P. BECTON, JR.
- --------------------------------------
Henry P. Becton, Jr.* Trustee June 16, 1999
/s/ DAWN-MARIE DRISCOLL
- --------------------------------------
Dawn-Marie Driscoll* Trustee June 16, 1999
/s/ PETER B. FREEMAN
- --------------------------------------
Peter B. Freeman* Trustee June 16, 1999
/s/ GEORGE M. LOVEJOY, JR.
- --------------------------------------
George M. Lovejoy, Jr.* Trustee June 16, 1999
/s/ WESLEY W. MARPLE, JR.
- --------------------------------------
Wesley W. Marple, Jr.* Trustee June 16, 1999
/s/ KATHRYN L. QUIRK
- --------------------------------------
Kathryn L. Quirk* Trustee, Vice President and Assistant June 16, 1999
Secretary
/s/ JEAN C. TEMPEL
- --------------------------------------
Jean C. Tempel* Trustee June 16, 1999
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ JOHN R. HEBBLE
- --------------------------------------
John R. Hebble Treasurer (Principal Financial and June 16, 1999
Accounting Officer)
</TABLE>
*By: /s/ SHELDON A. JONES
------------------------
Sheldon A. Jones**
** Attorney-in-fact pursuant to a power of
attorney contained in the signature page
of Post-Effective Amendment No. 8 to the
Registration Statement filed May 29,
1991 and pursuant to a power of attorney
contained in the signature page of
Post-Effective Amendment No. 13 to the
Registration Statement filed July
29,1996, and pursuant to a power of
attorney contained in the signature page
of Post-Effective Amendment No. 16 to
the Registration Statement filed July
29, 1998.
2
<PAGE>
File No. 2-82632
File No. 811-3699
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 19
TO REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
AMENDMENT NO. 23
TO REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940
SCUDDER GNMA FUND
<PAGE>
SCUDDER GNMA FUND
EXHIBIT INDEX
Exhibit (i)
Exhibit (j)
Exhibit (n)
2
Exhibit (i)
[LETTERHEAD OF DECHERT PRICE AND RHOADS APPEARS HERE]
June 16, 1999
Scudder GNMA Fund
Two International Place
Boston, Massachusetts 02110
Re: Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A (SEC File No. 2-82632)
Ladies and Gentlemen:
Scudder GNMA Fund, formerly Master Investment Services Tax Free Fund
and then Scudder Government Mortgage Securities Fund, (the "Trust") is a trust
created under a written Declaration of Trust dated March 24, 1983. The
Declaration of Trust, as amended from time to time, is referred to as the
"Declaration of Trust." The beneficial interest under the Declaration of Trust
is represented by transferable shares, $.01 par value per share, ("Shares"). The
Trustees have the powers set forth in the Declaration of Trust, subject to the
terms, provisions and conditions therein provided.
We are of the opinion that all legal requirements have been complied
with in the creation of the Trust and that said Declaration of Trust is legal
and valid.
Under Article V, Section 5.4 of the Declaration of Trust, the Trustees
are empowered, in their discretion, from time to time, to issue Shares for such
amount and type of consideration, at such time or times and on such terms as the
Trustees may deem best. Under Article V, Section 5.1, it is provided that the
number of Shares authorized to be issued under the Declaration of Trust is
unlimited.
By votes adopted on November 11, 1997 and November 9, 1998, the
Trustees of the Trust authorized the President, any Vice President, the
Secretary and the Treasurer, from time to time, to determine the appropriate
number of Shares to be registered, to register with the Securities and Exchange
Commission, and to issue and sell to the public, such Shares.
We understand that you are about to file with the Securities and
Exchange Commission, on Form N-1A, Post Effective Amendment No. 19 to the
Trust's Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the continuous offering of the Shares.
We understand that our opinion is required to be filed as an exhibit to
the Registration Statement. We are of the opinion that all necessary Trust
action precedent to the issue of the Shares has been duly taken, and that all
such Shares may be legally and validly issued for cash, and when sold will be
fully paid and non-assessable by the Trust upon receipt by the Trust or its
agent of consideration for such Shares in accordance with the terms in the
Registration Statement, subject to compliance with the Securities Act, the
Investment Company Act of 1940, as amended, and applicable state laws regulating
the sale of securities.
We consent to your filing this opinion with the Securities and Exchange
Commission as an Exhibit to Post-Effective Amendment No. 19 to the Registration
Statement.
Very truly yours,
/s/Dechert Price and Rhoads
Exhibit (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into the Prospectus and
Statement of Additional Information constituting the Post-Effective Amendment
No. 19 to the Registration Statement on Form N-1A (the "Registration Statement")
of Scudder GNMA Fund of our report dated March 12, 1999, on the financial
statements and financial highlights appearing in the January 31, 1999 Annual
Report to the Shareholders of Scudder GNMA Fund, which is also incorporated by
reference into the Registration Statement. We further consent to the references
to our Firm under the headings "Financial Highlights," in the Prospectus and
"Experts" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 15, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Scudder
GNMA Fund Annual Report for the fiscal year ended 1/31/99 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 0
<NAME> Scudder GNMA Fund
<S> <C>
<PERIOD-TYPE> 10-MOS
<FISCAL-YEAR-END> Jan-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Jan-31-1999
<INVESTMENTS-AT-COST> 396,061,595
<INVESTMENTS-AT-VALUE> 398,063,005
<RECEIVABLES> 41,913,990
<ASSETS-OTHER> 12,419
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 439,989,414
<PAYABLE-FOR-SECURITIES> 45,656,380
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,271,721
<TOTAL-LIABILITIES> 46,928,101
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 410,481,502
<SHARES-COMMON-STOCK> 26,319,381
<SHARES-COMMON-PRIOR> 26,503,842
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (19,324,201)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,904,012
<NET-ASSETS> 393,061,313
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,210,355
<OTHER-INCOME> 0
<EXPENSES-NET> 3,065,364
<NET-INVESTMENT-INCOME> 19,144,991
<REALIZED-GAINS-CURRENT> 1,847,588
<APPREC-INCREASE-CURRENT> 1,391,070
<NET-CHANGE-FROM-OPS> 22,383,649
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,144,991)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 74,346,313
<NUMBER-OF-SHARES-REDEEMED> (90,981,055)
<SHARES-REINVESTED> 14,012,577
<NET-CHANGE-IN-ASSETS> 616,493
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (21,164,139)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,042,022
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,065,364
<AVERAGE-NET-ASSETS> 389,254,800
<PER-SHARE-NAV-BEGIN> 14.81
<PER-SHARE-NII> 0.73
<PER-SHARE-GAIN-APPREC> 0.12
<PER-SHARE-DIVIDEND> (0.73)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.93
<EXPENSE-RATIO> 0.94
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
